This week’s reminder that inflation isn’t going away anytime soon | Private Equity Weekly

From consumer and wholesale prices to longer-term public expectations, inflation has provided multiple reminders this week that it’s not going away anytime soon.

Comprehensive data showed pressures were growing faster than expected, raising concerns that inflation could be more persistent than policymakers expected.

The bad news started on Monday, with a New York Federal Reserve survey showing consumers’ long-term expectations accelerated in February. News continued on Tuesday that consumer prices were up 3.2% from a year earlier, and Thursday’s news showed that pipeline pressures at the wholesale level are also heating up.

There’s a lot to consider when the Federal Reserve convenes its two-day policy meeting on Tuesday, where it will decide where interest rates will be and provide an update on longer-term developments.

“If the data continues to roll like this, it will become increasingly difficult to justify preemptive rate cuts,” wrote Steven Blitz, chief U.S. economist at TS Lombard. Taken together, the numbers suggest ” Severe deflation has stopped and appears to be reversing.”

The latest inflation shock came on Thursday, when the Labor Department reported that producer price indexA forward-looking indicator of pipeline inflation at the wholesale level showed an increase of 0.6% in February. That was double the Dow Jones forecast and pushed the 12-month level up 1.6%, the biggest gain since September 2023.

Earlier this week, the department’s Bureau of Labor Statistics said consumer price indexThe cost indicator of goods and services, which is widely watched in the market, increased by 0.4% this month and 3.2% compared with the same period last year. The latter figure was slightly higher than forecast.

While soaring energy prices contributed significantly to the rise in the inflation reading, there was also evidence of broader pressures on items such as air tickets, used cars and beef.

Indeed, goods prices rose 1.2% in the PPI data, the largest increase since August 2023, as the focus turned to services sector inflation.

“Producer price index data continue to provide signs that deflation in commodity prices is largely over,” Citigroup economist Veronica Clark wrote after the report was released.

All in all, high prices appear to be having an impact on consumer expectations and behavior. Although the Federal Reserve raised interest rates 11 times by a total of 5.25 percentage points and cut its bond holdings by nearly $1.4 trillion, inflation remains significantly lower than its peak in mid-2022, but inflation has proven resilient.

A survey by the Federal Reserve Bank of New York showed that three-year and five-year inflation expectations were raised to 2.7% and 2.9% respectively. While such surveys tend to be particularly sensitive to natural gas prices, this survey shows energy expectations are relatively stable and reflects consumer skepticism that the Fed can achieve its mission of 2% interest rates anytime soon.

On a policy level, this could mean the Fed could keep interest rates on hold for longer than the market expects. Earlier this year, traders in the federal funds futures market had priced in as many as seven rate cuts totaling 1.75 percentage points; this has since been reduced to three.

In addition to the surprisingly strong inflation data, consumers have also shown signs of abandoning large-scale shopping over the past few years. retail sales Growth of 0.6% was lower than expected and came after a 1.1% downward revision to January’s seasonally adjusted but not inflation-adjusted data.

Sales grew 1.5% over the past year, 1.7 percentage points below headline inflation and 2.3 percentage points below core inflation, which excludes food and energy.

Investors will get a sense of how Fed officials are feeling when the Federal Open Market Committee convenes its rate-setting meeting next week. The FOMC will release its interest rate decision (with virtually no change in either direction) as well as its revised outlook for long-term rates, GDP, inflation and unemployment.

Blitz, an economist at TS Lombard, said the Fed was right to take a patient approach after officials said in recent weeks that more data evidence was needed before taking action to cut interest rates.

He said: “The Fed has time to observe and wait, and the possibility of raising interest rates next is greater than zero.”