“We need to be patient and let the restrictive policy do its job because inflation is higher than we thought.” This was warned by Jerome Powell, president of the Federal Reserve (Fed) of the United States, just a few hours before the data came out yesterday that prices contained the escalation by 0.3% and the annualized level of inflation fell to 3.4%, another bigger contraction than had been predicted. Will this setback change the mind of the central bank of the United States?
This is the question, as the consumer price data gives wings to those who expect a downward revision of interest rates soon, for months anchored at 5.25%-5.50%, the level most high in more than two decades.
The Fed’s target is 2% annual inflation. “We don’t expect it to be a smooth road”, insisted Powell in his statements on Tuesday. The latest bets pointed to a cut in September. The new data means a slight drop, but suggests that inflation is regaining its tendency to slow down, which could cause the Fed to reconsider its stance. The next two meetings are in June and July.
Inflation contracted rapidly in 2023, fueling hopes that the Fed would begin tapering in early 2024. The numbers then became more complicated, largely because strong economic growth in the United States, which avoided a announced recession, led to think (a 30% chance, according to the consensus of analysts) a few weeks ago that the Fed might even be forced to raise the price of money.
On this occasion, so the improvement was known, the Dow Jones opened the doors with a rise of 0.5%. In another good sign for investors, 10-year Treasuries fell; they were thus advancing to a more than likely cycle of monetary relaxation.
Excluding more volatile items such as energy and food, core inflation also fell by 0.3% (from 0.4% in the previous month) to 3.6% (vs. 3.8% in March) on an annual basis, although both percentages are in line with forecasts.
The new data is comparable to that of the spring of 2021, a record still far from the 9.1% that would be reached in June 2022, when the Federal Reserve accelerated the rate hikes it had previously used to curb a upward spiral of prices.
Analysts said Wednesday’s inflation report is a small step, but in the right direction. The price of gasoline and rents were the elements that drove the increase in prices during the past month. Housing increased by 0.4% to reach 5.5% from one year to the next. This resistance fits badly with the Fed’s objective and darkens the illusion of those who are already waiting for the cuts. Meanwhile, the cost of energy rose by 1.1% and puts the annualized number at 2.6%. In contrast, food remained flat, with an increase of 2.2%, and vehicles, both new and second-hand, a sector that drove inflation in the post-pandemic period, slowed their rise to stand at 1.4% and 0.4%, respectively.
In another statistic, retail sales were unchanged against the estimate that they would grow by 0.4% compared to March. Consumers, the economic engine of the US, take advantage to continue buying.
