The US And The Inflation Tug-Of-War

The Focus This Week: The big inflation tussle

After hitting a scorching peak of 9.1% in the summer of 2022, US inflation has given up some ground. But a well-matched tug-of-war isn’t lost or won quickly. It’s an inch gained, an inch lost, until the stronger side prevails. And it’s very much a game of inches now: shorter-term inflation measures suggest that progress has slowed and may have stalled. After chilling around the 3% mark for a good nine months, inflation’s making some sneaky moves upward – and it’s not just the more volatile things like energy and food prices stirring the pot. Core inflation, which excludes that stuff to give a more real-deal look at underlying price pressures, has also hopped a little.

Of course, inflation’s a big deal for the Federal Reserve (the Fed): keeping it low is one of its two main goals, along with maintaining maximum employment. Now, achieving both can be a delicate balance: cranking up interest rates can clamp down on inflation, but it can also make matters worse for economic growth, and leave people out of work. So far, the balancing act has been mostly working out: inflation is edging closer to target and the job scene’s been holding remarkably steady. But it won’t want to push its luck too far: you can bet the Fed is looking forward to lowering those interest rates, aiming for a return to more “normal” levels. So let’s hope inflation doesn’t decide to muscle back up again, as that could throw a wrench in those plans, possibly pushing the Fed to hold off on cuts or (gasp) even unleash another rate hike to keep things in check.

For now, the Fed’s playing it pretty cool. Policymakers say the latest numbers haven’t changed the game plan – which is to dial down rates “at some point this year”, but only when they’re confident inflation is on a steady path back to that golden 2%.

That makes next week’s inflation update a real cliffhanger. If the March data comes in even slightly hotter, the Fed’s going to have a tough time convincing everyone that the 2% target is within reach. And, let’s be real, a surprise twist like that could seriously unsettle markets that have been banking on interest rate cuts for a while now.

On The Calendar

• Wednesday: US consumer price index (March), Bank of Canada interest rate decision, minutes from the Fed’s latest meeting.
• Thursday: Chinese inflation (March), European Central Bank interest rate decision, US producer price index (March).
• Friday: UK GDP (February), US consumer confidence (April).

What You Might’ve Missed Last Week

US

• Amazon took its AI strategy up a notch.
• The US economy added tons of new jobs, suggesting the Fed can be patient on inflation.

Europe

• Eurozone inflation cooled sharply – and put the European Central Bank in the hot seat.

Asia

• China’s manufacturing sector showed new signs of life.

Why It Matters

Amazon isn’t known for doing things on a small scale, so it’s probably not a huge surprise that the tech behemoth is going big on artificial intelligence, making its heftiest-ever investment and dropping a whopping $4 billion into AI dynamo Anthropic. This move aims to turbocharge its Amazon Web Services (AWS) division, enhancing its cloud offerings, from data storage to cybersecurity muscle. At the same time, Amazon has unveiled plans to invest nearly $150 billion in data centers over the next 15 years. It’s a bit of a flex in the intensifying battle for AI supremacy among the Big Tech titans.

The hard-working American economy hammered out 303,000 new jobs in March, according to a report released Friday by the US Labor Department. That’s way higher than the 214,000 economists expected. Now, it’s wise to sprinkle a bit of skepticism on these stats. The whirlwind of work-life changes brought on by the pandemic, a slide in employer participation in the government’s data collection, and a wave of new arrivals have been jostling the figures lately, making the labor market’s pulse seem a bit erratic. Case in point: the report’s hiring figures have been revised downward a more-than-typical seven times since the beginning of 2023. Nonetheless, if you take a step back and look at the big picture, the trend shows the job scene remains hot. That’s not great news for investors who are pinning their hopes on rate cuts – because it means the Fed doesn’t need to rush into making any changes.

European consumers got a bit of relief in March, with prices rising just 2.4% compared to the same time last year, only slightly above the European Central Bank’s (ECB’s) 2% target. That subtler-than-anticipated pace is expected to have big implications – potentially paving the way for at least three interest rate cuts from the ECB this year, with the first expected in June. But it’s a tricky situation. If the central bank cuts rates too soon or too sharply, it could risk an inflation resurgence. If it cuts too late or too timidly, it could drag the economy down. So investors – and central banks everywhere – will be watching closely on Thursday, when ECB makes its next rate decision.

China’s economy hasn’t exactly inspired cartwheels lately, but the latest data from the country’s ultra-important manufacturing sector might have some folks feeling head-over-heels. Private and public manufacturing gauges both exceeded expectations in March, kindling optimism for a broader economic comeback. And, yeah, the economy still has plenty of other hurdles to clear: it’s mired in a property crisis, the threat of US trade barriers still looms large, and consumer spending hasn’t really found its feet. But the manufacturing data, at least, seemed like a step in the right direction.

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Originally Posted April 5, 2024 – The US And The Inflation Tug-Of-War

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