Data Reinforce Notion That Interest Rates Likely Won’t Be Cut Any Time Soon
Recent data has confirmed what many consumers have already been feeling – inflation is on the rise and showing no signs of slowing down. The latest report from the Bureau of Economic Analysis revealed that the Personal Consumption Expenditures (PCE) index rose by 2.7% over the last year in March, up from 2.5% in February. This increase, driven primarily by higher food and energy prices, exceeded the expectations of economists.
Other Measures Foretold the Increase
Earlier this month, the Consumer Price Index also indicated a surge in inflation, further reinforcing concerns about rising prices. However, the PCE inflation is particularly significant as it is closely monitored by the Federal Reserve, which determines the nation’s monetary policy. The recent uptick in inflation is alarming for those hoping for lower interest rates on loans such as mortgages and credit cards.
Dan North, senior economist at Allianz Trade, noted that the trend in inflation is concerning, stating, “It’s going the wrong way.” The discrepancy between the two major inflation measures lies in their calculation methods, with PCE inflation placing less emphasis on housing costs. The persistent high inflation levels are likely to keep interest rates elevated as the Fed continues its efforts to combat inflation.
Inflation’s Core Is Heating Up
The Federal Reserve has maintained the fed funds rate at its highest level since 2001 in response to escalating inflation. This decision has led to increased interest rates on various types of loans. Fed officials have emphasized the need for inflation to stabilize around a 2% annual rate before considering any rate cuts.
The latest report also highlighted a concerning trend in core inflation, which excludes volatile prices for gas and energy. Core inflation rose by 2.8% over the year, surpassing expectations and indicating sustained pressure on long-term inflation rates. The report further revealed a significant increase in personal income and spending, driven by a robust labor market and consumer confidence.
Fed Can’t Get Confident with Numbers Like These
The string of adverse inflation reports this year, coupled with strong economic growth indicators, is likely to deter the Federal Reserve from implementing any rate cuts in the near future. According to North, Federal Reserve Chair Jerome Powell and other officials are unlikely to consider rate cuts until at least November.
North explained, “If you’re Jay Powell, and you’re looking at the growth side of the economy, you’re saying, ‘Well, it’s doing fine—look at personal consumption, look at the labor market. It doesn’t need any stimulus, so I don’t need to cut rates from that perspective.’ And if I look at the inflation side: To look at that core number, we’re at 2.8%. That’s not 2%. …We’re a long, long way from that as well. So this just keeps Jay Powell out for several months.”
Overall, the latest data paints a clear picture of the challenges facing policymakers as they navigate the delicate balance between controlling inflation and supporting economic growth. With inflationary pressures persisting and economic indicators remaining strong, it appears that interest rates are unlikely to be cut anytime soon.
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