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CPI Data Offers No Clear Way Forward for Fed

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2023-04-13

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Like the March job numbers there was just enough in the US consumer price index data overnight to justify both another quarter of a percent rate hike from the Federal Reserve or a pause.

US headline Consumer Price Inflation fell to an annual 5% rate in March, down from 6% in February and the lowest for almost two years as the month-on-month rise grew by just 0.1%, down from 0.4% in February thanks to lower petrol and energy prices.

Normally that would have been seen as helping the Fed to pause, but the central bank and most economists look more closely at core inflation and that rose 0.4% in March to an annual reading of 5.6%.

That could be enough to allow the Fed to raise interest rates at least once more time at its meeting early next month.

“It’s comforting that headline inflation is coming down, but the inflation story has had some shifts under the hood in the last couple of years,” said Sonia Meskin, head of US economics at BNY Mellon’s investment division. “Overall inflation still remains much too strong.”

There were more tantalising figures hinting at what is happening. Rental costs, which have been one of the main drivers of core inflation (as they are in Australia), rose at the slowest pace in a year.

And grocery prices fell for the first time in two and a half years, dipping 0.3% in March from February as the price of beef, milk, fresh fruit and vegetables fell. Egg prices slumped 11% as production rose after a bird flu epidemic that had hit flocks and cut production eased.

The jobs data showed a slowing in monthly new job numbers and another easing in the annual growth in wages (while the separate jobless claims data showed much higher readings - over 200,000 for the past 9 weeks) after seasonal adjust factors were applied. Those factors, and the earlier fall in job vacancies to 9.9 million in February (the first time under 10 million for months).

Moody’s economists wrote on Thursday that the March data showed, "the breadth of job growth is narrowing, labour demand is easing and pockets of weakness are emerging in the interest-rate sensitive goods sector."

"As the US economy further digests rate hikes, we expect these early signs of labour market weakness to deepen and broaden, driving the unemployment rate closer to 5% by year-end."

Could that and the weakening pace of inflation be enough to get the Fed to think again?

Well, the minutes of the last meeting of the Fed’s key Open Market Committee shows that a pause was discussed in the wave of the bank uncertainties from mid-March onwards.

The minutes show the Fed members scaled back their expectations for rate hikes this year after the bank collapses last month, and stressed they would remain vigilant for the potential of a credit crunch resulting from the banking crisis to further slow the US economy.

Before Silicon Valley Bank failed on March 10 and Signature Bank failed on March 12, sending ripples across the global banking system (and Credit Suisse was forcibly merged into UBS in Switzerland), Fed officials had been looking at several more rate moves this year to bring stubbornly inflation back under control.

But officials adjusted their views and the central bank lifted rates by only by a quarter point, and officials forecast just one more rate increase this year.

Fed chair, Jerome Powell made it clear at his post meeting media conference that whether and by how much officials adjusted policy going forward will depend on what credit conditions and incoming economic data, like the labour force and inflation reports.

So far the two most important bits of data - jobs/wages and inflation - suggest the case is there for a pause. A weak March Retail sales figure on Friday would enhance that argument.

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