Source: Sina US stocks

This year was supposed to be the last mile for the US inflation rate to fall to 2%, thereby causing the Federal Reserve to gradually cut interest rates from a 20-year high. Now these expectations have been dashed.

As it turns out, entering 2024, with the economy and labor market remaining resilient, the price increase was much more sticky than expected. Federal Reserve Chairman Jerome Powell said on Tuesday that continued inflation means that borrowing costs will remain the same and rise for a longer period of time. This is a shift in the tone of relevant global policies.

Continued housing shortages and rising commodity prices and auto insurance premiums are also partly responsible. However, some people also pointed out that Powell himself signaling interest rate cuts too early ignited optimism in financial markets and stimulated economic activity.

“They just misunderstood the inflation situation,” said Stephen Stanley, chief economist at Santander US Capital Markets LLC in the US. “The mistake they made was that they were too fascinated by the really strong growth and healthy 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 roughly 6 times they expected in early 2024 and the 3 times predicted by Federal Reserve 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 overall inflation is still on a downward trend, but they also stress that borrowing costs will not fall until they have more confidence in the (inflation) 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%. But the Federal Reserve's favorite indicator is the personal consumer spending price index PCE, which has been close to the central bank's 2% target — 2.5% in February — but progress on this indicator has also stalled.

Here are some reasons for the new round of inflation in the US:

Housing, insurance

Housing consumption, which accounts for about one-third of the CPI, proved to be the most stubborn. Although some timely metrics from the US Bureau of Labor Statistics, Zillow Group Inc. and Apartment List show that the rent growth rate for new leases is declining, the corresponding components of the CPI have yet to reflect this.

Part of the reason for the delay in moving is that most tenants haven't moved in a given year. This is especially true for homeowners, many of whom have locked in low mortgage rates during the pandemic and don't want to accept new mortgages above 7%.

Furthermore, the index's construction, which is only sampled every six months, also played a role, which means that changes in rent in monthly data take time to digest.

At the same time, PCE grants far less significant rights to housing, which helps explain why it is trending lower than CPI.

Another driver of inflation is the cost of insurance. Tenant and home insurance is growing at its fastest rate in nine years, while auto insurance surged 22.2% in the year ending March, the highest level since 1976. One key reason: Today's automotive technology is more complex, so maintenance costs are higher.

Commodities

After experiencing a decline for most of last year, the escalation of the war in the Middle East in the first quarter is likely to further push up oil prices. The rise has turned into a rise in gasoline prices. Electricity prices are also rising.

Central bankers prefer to focus on so-called core inflation indicators, which excludes food and energy prices that may be highly volatile. They also looked at a narrower indicator called the “supercore,” which refers to the cost of services that don't include energy and housing — even this indicator is too strong because of a strong labor market.

But the sharp rise in the price of oil and other raw materials cannot be ignored, as it could seep into more expensive transportation and commodities. Gasoline and housing together accounted for more than half of the March CPI increase.

Powell said in December last year that the interest rate cut was “obviously” a topic of discussion, triggering a large number of bets on interest rate cuts in the market.

Economist Anna Wong said that the effect of these remarks is equivalent to cutting interest rates by 0.14 percentage points, and this year's CPI will also increase by about 0.5 percentage points.

Now Powell is considering the possibility that inflation has indeed stopped and the threshold for interest rate cuts may have been raised. “If the unemployment rate is basically flat compared to today, it increases the risk that interest rates will not be cut this year.”

The market is booming

Furthermore, in addition to the economic impact since Powell's speech in December last year, the total value of stocks and bonds increased by $7.5 trillion when the market peaked in March — about 30% of the US gross domestic product (GDP).

All of this is driving a substantial relaxation of the financial situation, and indicators tracking the investment background suggest that it is more relaxed now than before the Federal Reserve began actively tightening two years ago.

Former Federal Reserve senior economist Claudia Sahm (Claudia Sahm) blames the market, not Powell. “The level of active listening is shocking,” said Sahm (Sahm), chief economist at New Century Advisors LLC (New Century Advisors LLC).

edit/lambor