This year was supposed to be the last mile for the US inflation rate to fall to 2%, which led the Federal Reserve to gradually cut interest rates from a 20-year high. Now these expectations have been dashed.
Facts have proved that in 2024, with the economy and labor market remaining resilient, the stickiness of price increases is much greater than expected. On Tuesday, Jerome Powell, chairman of the Federal Reserve, said that sustained inflation meant that borrowing costs would remain unchanged and rise longer. This is a change in the tone of relevant global policies.
The continued shortage of housing and the rise in commodity prices and auto insurance premiums are also partly responsible. However, some people also pointed out that Powell himself sent an early signal of interest rate cut, which ignited optimism in the financial market and stimulated economic activity.
"They just got the inflation situation wrong," said Stephen Stanley, chief economist of Santander US Capital Markets LLC in the United States. "Their mistake was that they were too obsessed with the really strong growth and benign inflation we saw in the second half of last year."
Traders now expect to cut interest rates only once or twice this year from the current level of 5.25% to 5.5%. This is far from the estimated six times in early 2024 and the three times predicted by Fed officials a month ago. Investors and economists are warning that interest rates may not be cut at all this year.
Federal Reserve officials insist that inflation is still in a downward trend on the whole, but they also emphasize that borrowing costs will not decline until they are more confident about the trajectory.
Although the damage caused by inflation is largely reflected in the consumer price index - in March, its year-on-year growth rate rose to 3.5%. However, the preferred indicator of the Federal Reserve is the personal consumption expenditure price index (PCE), which has been close to the central bank's target of 2% - 2.5% in February - but the progress of this indicator has also stalled.
Here are some reasons for the new round of inflation in the United States
Housing and insurance
Housing consumption, which accounts for about one-third of the CPI, has proved to be the most stubborn. Although some timely indicators from the U.S. Bureau of Labor Statistics, Zillow Group Inc. and Apartment List show that the growth rate of rent for new leases is declining, the corresponding components of CPI have not yet reflected this.
Part of the reason for the delay in moving is that most tenants did not move in a particular year. This is especially true for homeowners, many of whom locked in low mortgage rates during the pandemic and did not want to accept new mortgages higher than 7%
In addition, the construction of the index, which is sampled only once every six months, has also played a role, which means that changes in rent in monthly data need time to digest.
At the same time, the right to housing granted by PCE is much less important, which helps to explain why its trend is lower than the CPI.
Another driver of inflation is the cost of insurance. Tenant and family insurance are growing at the fastest rate in nine years, while auto insurance has soared 22.2% in the year to March, the highest level since 1976. One key reason is that the current automobile technology is more complex, so the maintenance cost is higher.
Bulk commodities
After falling for most of last year, the escalation of war in the Middle East in the first quarter is likely to further push up oil prices, which has been translated into rising gasoline prices. Electricity prices are also rising.
Central bank governors are more willing to pay attention to the so-called core inflation indicators, that is, to eliminate food and energy prices that may fluctuate significantly. They also focused on a narrower indicator called "super core", which means excluding the service costs of energy and housing -- even this indicator is too strong because of the strong labor market
But the soaring price of oil and other raw materials cannot be ignored, because it may penetrate into more expensive transportation and commodities. Together, gasoline and housing accounted for more than half of the CPI increase in March.
Powell said in December last year that the interest rate reduction action was "obviously" a topic of discussion, which triggered a large number of bets on interest rate reduction in the market.
Economist Anna Wong said that the effect of these comments was equivalent to a 0.14 percentage point interest rate cut, and this year's CPI will also rise by about 0.5 percentage point.
Now Powell is considering the possibility that inflation has indeed stopped cutting interest rates and the threshold may have risen. " If the unemployment rate is basically flat compared with today, it will increase the risk that interest rates will not be cut this year. “
The market is thriving
In addition, in addition to the economic impact since Powell's speech last December, the total value of stocks and bonds at the market peak in March increased by $7.5 trillion - about 30% of the US gross domestic product.
All these are promoting the substantial relaxation of financial conditions. The index tracking the investment background shows that it is more relaxed now than it was two years ago before the Federal Reserve began to actively tighten.
Claudia Sahm, a former senior economist of the Federal Reserve, blamed the market, not Powell. Sahm, chief economist of New Century Advisors LLC, said: "The level of active listening is shocking."
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