This Week's State Of The Economy - What Is Ahead? - 12 April 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Apr 18, 2024

This Week's State Of The Economy - What Is Ahead? - 12 April 2024

The latest consumer price data dominated what was an otherwise light week in terms of fresh economic data. Inflation data have taken on increased importance as we all try to predict when the Federal Open Market Committee (FOMC) will embark on its highly-anticipated easing cycle. This week's data tell us, it may be awhile.

The Consumer Price Index (CPI) came in hot in March, rising 0.4% at both a headline and core level (once we strip out food and energy prices). As seen in the nearby chart, the three-month annualized rate of the core CPI climbed to 4.5%, an indication price growth accelerated in the first quarter. Core goods deflation returned in March, but core services inflation remains stubborn. The descent in shelter costs remains painstakingly slow as the real-time measures take time to show up in the CPI data. Primary shelter inflation rose 0.4% in March, while core services ex-housing was also hot, up 0.6%, amid gains in medical services as well as motor vehicle insurance and maintenance.

We suspect the first quarter acceleration in core CPI reflects the often-choppy nature of monthly price movements and is a “bump” in the road back toward the Fed's inflation target, rather than a sign that slowing inflation is reversing course. But bumps still slow the journey, and we're not yet there in terms of Fed easing.

While we expect inflation to trend lower as the year progresses, it is still a problem today. Inflation was reported as the single most important problem faced by small business owners in March. In addition to elevated cost pressure, dwindling sales expectations and challenges finding qualified labor pushed small business sentiment to its lowest level since 2012 last month. But input price pressure is showing signs of easing as the Producer Price Index (PPI) showed a bit more improvement than the CPI in March, rising just 0.2%, or the slowest in three months. The PPI data still suggest the core PCE deflator, the Fed's preferred measure of consumer price inflation, will also show stalled progress in reducing inflation (data released April 26). Ultimately consumers still face rising prices. Year-ahead consumer inflation expectations rose to 3.1%, while expectations 5-10 years out hit 3.0% in early April. Despite hitting the highest level in six months, as seen in the nearby chart, long-term expectations are still consistent with its recent range and will be considered "anchored" by the Fed.

Overall, the latest data push out the timing and degree of Fed easing this year. We now expect the FOMC to first cut the fed funds rate by 25 bps at its Sept. 18 policy meeting followed by 25 bps rate cuts at every other FOMC meeting through the end of next year. This means just 50 bps of total easing in 2024 followed by another 100 bps of easing in 2025, which puts the target range for the fed funds rate at 3.75%-4.00% at year-end 2025. For our full economic forecast, please see our latestMonthly Economic Outlook published this week.

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