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Hot CPI and PPI Data Push Back Rate Cut Expectations, “No Landing” Narrative Takes Hold

CPI:  Tuesday’s report indicated CPI rose 0.4% for the month (vs 0.3% expected) and 3.2% for the year (vs 3.1%). Remember when we cheered the monthly increase dropping from 0.4% (September) to 0.1% in October? From November to February, we have seen 0.2%, 0.2%, 0.3%, 0.4%. The annualized rate has shot up past the Fed’s target of 2%. Energy and shelter account for 60% of that gain. Silver lining: food costs did not rise for the first time since April 2023 (flat grocery prices with restaurant food up barely 0.1%). Shelter costs are very gradually (but steadily) coming down. The annual rate was up 5.7%, the lowest since July 2022.

PPI: Today’s report was way up, 0.6% monthly, signaling possible ripple effects on consumer inflation in the coming months. Note that annual travel and leisure services costs rose 3.8% (no matter how many high-profile tech company layoff announcements are in the CNBC headlines, this sector continues to run hot and contribute to labor market tightness). Remember, the Fed is “data dependent” so this week’s data pushes out rate cut expectations. Thus, cuts at next week’s meeting or May 1 are now off the table as futures markets indicate 95% probability of sitting tight at both meetings.

Narrative: Over the past year we have gone from “higher for longer” to “lower but slower” to “soft landing” to the latest, “no landing” – meaning we are “there” now, stuck between a tight labor market and high rates. Some aspects of inflation are agnostic regardless of rates. Fed Chair Powell recently spoke of insurance for example. Natural disasters, major insurers pulling out of certain markets, trouble in the reinsurance markets and factors such as high auto repair costs (parts have become increasingly complex and expensive, even if there are the same number of incidents, each one costs exponentially more). One pundit wrote that America is becoming “uninsurable.” The economy may be “moving sideways” as disinflation stalls. Speaking of Powell, he took heat from Congress regarding the famous 2.0% inflation mandate. If it was 3.0%, he could be cutting rates now, right? During his testimony on Capitol Hill, Powell said that the 2.0% is critical for the economy and the Fed is not anywhere near changing that target. Then he said it five more times! He is pretty much painted himself into a corner (he seems to like being there), as that level of insistence during an election year pretty much ends that debate (for now). Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.