Inflation Expected to Show Signs of Cooling
The March report on consumer prices will show overall inflation slowing, although some components likely sped up, complicating the calculation for policymakers.
Most likely, inflation moderated in March. However, there are concerning signs below the surface. A closely monitored measure of key price rises is expected to accelerate back up after five years of slowing.
Based on a Bloomberg survey, economists believe that the Consumer Price Index rose 5.1 percent between February and March. This is down from 6 percent in February.
This mixed picture will be a challenge for the Federal Reserve, which is the main anti-inflationist in the country. Since March 2022, the central bank has attempted to control price rises for a little more than a decade. It raised interest rates to almost 5 percent from close to zero. The inflation rate peaked at 9 percent in the summer of last year. Although it has slowed down, it has been slow and bumpy. It is still a long way from the 2 percent inflation which was normal prior to the outbreak of the pandemic in 2020.
In a preview note, Tiffany Wilding, an economist from Pimco, stated that inflation was not expected to slow down in a straight line. "And we expect inflation to continue to drop over the course of this year, despite this report," Wilding, an economist at Pimco, wrote in a note previewing the release.
Recent developments have made it difficult to predict how fast and how completely price rises will cool. Recent developments have made it more difficult to predict how much the impact of a series of bank failures that occurred last month on the economy. While Fed officials urge caution amid the turmoil, others advise that the central bank keep its foot on it and focus on fighting rising prices.
Fed officials aim for 2 percent inflation. However, they use a different index to define it: the Personal Consumption Expensions measure. This measure uses data from the Consumer Price Index but is calculated differently. This measure is also released a few months after the Consumer Price Index.
John C. Williams, president of the Federal Reserve Bank of New York said Tuesday that there was more to be done in bringing down prices and suggested that the March forecast by the central bank for one more quarter point rate move was still a reasonable place.
Austan D. Goolsbee (the president of the Federal Reserve Bank of Chicago) suggested that bank failures have made it more difficult for consumers and businesses to get credit. This could slow down the economy and create a need to be cautious.
Mr. Goolsbee stated that he believes it was important to gather more data before raising rates too aggressively, until we can see the impact of headwinds on our efforts to lower inflation.
According to the Fed's most recent estimates, officials could raise rates by a quarter of a point, just above 5 percent, shortly after the March collapse of Signature Bank and Silicon Valley Bank. On May 3, the central bank will announce its next policy announcement.
It is now much more costly to borrow money to purchase a home or expand a company because of higher interest rates. This is slowing down economic activity. Wage growth also slows as demand falls and the labor market becomes more flexible.
This could lead to a lower inflation rate. Companies might raise their prices to pay for labor costs if wages rise quickly. Customers will likely be able to afford higher prices. Businesses may find it more difficult to increase prices while not scaring shoppers as families become less able to pay.
Fed officials closely monitor inflation in services, and especially services other than housing, to see if price increases will slow.
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Stocks rose and yields on government bonds were unchanged Tuesday morning as investors feared more signs of stubborn inflation.
The futures on the S&P 500 index, which allow investors to place bets on the index before the market opens, rose by about 25% on Tuesday morning. This month has seen the index remain in a rut, as cautious investors assess the economic outlook.
Investors must assess the rate of inflation and whether or not the Federal Reserve will raise interest rates to curb rising prices.
According to Wells Fargo analysts, Tuesday's data will show that "progress in lowering inflation remains painfully slow." This, in turn, is likely to keep the Fed in trouble as the central bank attempts balance slowing down the economy without causing it to spiral into a worse recession.
Increased interest rates are already affecting corporate profitability. Citibank strategists say that further increases will likely impact the stock market, "especially against the backdrop of rising recession fears."
The interest rate futures market prices, which allow investors bet on the direction of interest rates, indicate that expectations are already tilting towards the Fed making a quarter point increase in May.
The two-year Treasury yield, which can be sensitive to interest rates expectations, remained steady at 4.05 percent, compared to 3.8 percent a week earlier.