Fed policymakers looked to Wednesday's new inflation report for evidence that higher-than-expected price increases earlier this year were temporary and not a sign that efforts to curb inflation are stalling. Will pay attention.
This makes this announcement extremely important as central bank authorities consider when and by how much they can lower interest rates.
Economists say the consumer price index is likely to rise 3.4% in March compared to the same month last year, slightly up from 3.2% in February. However, that increase would also include a rise in gasoline prices.
Analysts tend to focus on inflation measures that subtract fuel and food prices, both of which are volatile, to get a better picture of underlying trends. This “core” metric is expected to rise 3.7% year-on-year, slightly lower than February's 3.8%. This would be the best annual statistic since the start of 2021, and is likely a positive sign for central bankers.
This week's inflation numbers come at a critical juncture for the Fed. Central bankers want to be sure that higher-than-expected inflation at the start of the year is just a seasonal anomaly and not evidence that inflation is stuck well above the 2% inflation target. .
Although the Fed officially targets a separate measure, consumer spending inflation, the consumer price index is released earlier and includes data that feeds into other indicators. As such, they will be closely monitored for signals on how price pressures are building.
Policymakers have made clear they want to see more evidence that inflation is cooling before cutting rates. Fed officials have raised borrowing costs to 5.3% in 2022 and early 2023, a level they believe is high enough to have a significant impact on the economy. Central bank officials predicted in March that the central bank would cut interest rates three times this year.
But Fed officials don't want to cut rates until they are confident that inflation is on track to return to normal. If borrowing costs are lowered too quickly or too much, there is a risk that price increases will accelerate again. And if households and businesses begin to expect inflation to remain slightly high, officials are concerned that it could become even more difficult to contain inflation going forward.
The threat of prolonged inflation has become a more serious concern for policymakers since the beginning of the year. Inflation has been steadily declining for months, but has leveled out in recent months, causing some alarm at the Fed and among forecasters. Earlier this year, investors expected the Fed to cut interest rates sharply to about 4% in 2024, but those expectations have receded. Investors are currently expecting only two or three rate cuts.
Many economists think the strong inflation numbers in January and February may have been a fluke. Companies, among others, may have waited until the beginning of the year to pass on price increases. And analysts see several underlying reasons why inflation could cool through 2024.
Economists at Goldman Sachs said this week that they expect “more disinflation” this year, in part because auto prices have stabilized, partially offset by higher health insurance inflation. He said this is because he expects major rental housing prices to fall.
Laura Rozner-Warburton, senior economist at Macro Policy Perspectives, said inflation could fall even faster than the Fed expects, and officials want to avoid putting too much stress on the economy and risking a recession. Therefore, he said there is a possibility that interest rates could start to be lowered this summer. .
“I don't think we need to wait too long because by then it will be too late and a soft landing will be in jeopardy,” she said.
But other economists are more cautious.
Analysts at Deutsche Bank called this week's inflation data a “key factor in determining the timing and size” of a rate cut, given the combination of stronger-than-expected inflation and still-strong economic growth and employment. It is suggested that the criteria for taller than.
