The last bit of inflation news that Federal Reserve officials will review before next week's policy meeting has been released, and it's not all very positive.
A separate report this week showed that a composite of Commerce Department indicators that the Fed relies on as an inflation signal shows that prices are still rising at a pace that remains well above the central bank's 2% annual target. It was done.
The overall picture includes several salient points. In other words, the ample amount of money still circulating in the financial system gives consumers permanent purchasing power. In fact, shoppers are spending more than they are taking in, a situation that is neither sustainable nor deflationary. Finally, consumers dip into their savings to fund those purchases, creating a scenario that is unstable, if not now, then in the future.
Taken together, the Fed is likely to be cautious and not in the mood to start cutting rates any time soon.
“Just spending a lot of money creates demand and creates stimulus,” said Joseph LaVogna, chief economist at SMBC Nikko Securities.With unemployment below 4%, it's not surprising that prices haven't come down “The amount of spending will not come down anytime soon. Therefore, the inflation scenario could become sticky.”
In fact, while spending exceeded income in March, as in three of the past four months, the personal savings rate was at its lowest level since October 2022 at 3.2, according to data released Friday by the Bureau of Economic Analysis. %.
At the same time, the personal consumption expenditures price index, the Fed's key measure in determining inflationary pressures, rose to 2.7% in March when including all items but excluding more volatile food and food products. In terms of important core indicators, it was only 2.8%. energy prices.
The ministry reported the day before that the annualized inflation rate for the first quarter was 3.7% in the core rate for the first quarter and 3.4% on the aggregate basis. This is because the real gross domestic product (GDP) growth rate slowed to 1.6%, well below consensus expectations.
danger scenario
The stubborn inflation statistics raised some ominous feelings. That means the Fed will have to keep rates higher for a longer period of time than the Fed or financial markets would like, threatening the economy's expected soft landing.
An even more dire threat is that if inflation really persists, central bankers may have to consider future rate hikes rather than just keeping interest rates where they are.
“Right now, that means the Fed won't cut rates, and if [inflation] “If interest rates don't come down, the Fed will either raise them at some point or keep them there for a long time,” said LaVogna, who served as chief economist at the National Economic Council under former President Donald Trump. ” he said. “Will it end up being a hard landing?”
The current US inflation problem first surfaced in 2022 and had multiple causes.
In the early days of the flare-up, Fed officials believed the problem, which was largely due to supply chain disruptions, would resolve itself once pandemic restrictions eased and shippers and manufacturers had a chance to catch up.
However, even with the coronavirus economic crisis in full force, Congress and the Biden administration continue to spend lavishly, with the budget deficit at the end of 2023 at 6.2% of GDP. . This is the highest amount since 2012, excluding the period of COVID-19. And this level is generally associated with economic downturns, not expansions.
In addition, the still active labor market, where job vacancies temporarily outnumbered job vacancies by a ratio of 2 to 1 and currently stands at a ratio of approximately 1.4 to 1, also contributed to the continued high wage pressures.
Even as demand shifts back from goods to services, which is now the normal state of the U.S. economy, inflation remains high, disrupting the Fed's efforts to rein in demand.
Fed officials had believed that lower home prices would ease inflation this year. Most economists still expect shelter-related prices to fall due to the influx of supply, but prices are rising in other areas.
For example, inflation in core PCE services excluding housing (a relatively new wrinkle in the inflation equation known as “supercore”) has increased by an annualized rate of 5.6% over the past three months, according to Mike Saunders, head of fixed income at Madison Investments. It continues to be .
Demand, which was supposed to be suppressed by the Fed's rate hikes, remains strong, contributing to higher inflation and suggesting the Fed may not be strong enough to curb the pace of price rises. .
“If inflation remains high, the Fed will have to make a difficult choice: push the economy into recession, abandon the soft-landing scenario, or allow inflation to exceed 2%,” Sanders said. Ta. “For us, accepting higher inflation is the smarter option.”
Worry about hard landings
So far, the economy has managed to avoid widespread damage from inflation problems, although there are some notable cracks.
Credit delinquencies are at their highest level in a decade, raising fears on Wall Street of more volatility ahead.
Inflation expectations are also on the rise, and the University of Michigan's consumer sentiment survey, which is attracting attention, shows that inflation expectations one year from now and five years from now are 3.2% and 3%, respectively, the highest levels since November 2023. It has become.
JPMorgan Chase CEO Jamie Dimon said this week that all government spending will lead to more unmanageable inflation than the current situation, after calling the U.S. economic boom “unbelievable” on Wednesday. He even wrote a letter to the Wall Street Journal saying he was concerned that he was causing a crisis. It is currently highly rated.
“That's been a big driver of this growth, and that could lead to another effect in the future called inflation, which may not go away in the way that people are expecting,” Dimon said. . “So I'm looking at the range of possible outcomes. We could have a soft landing. I'm a little more concerned that the economy isn't that soft and that inflation doesn't go as people expect. ”
Dimon estimated that the market has priced in a 70% chance of a soft landing.
“I think it’s half that,” he said.
This article originally appeared on NBCNews.com