Thursday, May 12 2022

Amid the first signs of an inflation spike

A cyclist passes the US Federal Reserve in Washington. Photo: Reuters/File

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A cyclist passes the US Federal Reserve in Washington. Photo: Reuters/File

U.S. Federal Reserve policymakers appear poised to offer a series of aggressive interest rate hikes at least through the summer to deal with high inflation and soaring labor costs, even if two reports released on Friday showed tentative signs, both could peak.

Soaring food and gasoline prices pushed headline inflation to a new 40-year high of 6.6% in March, according to Commerce Department data. At more than triple the Fed’s target, high inflation is why the central bank is expected to accelerate the pace of rate hikes with a half-point increase at each of its next three meetings and continue to raise rates until the end of the year.

Contracts linked to the Fed’s key rate now show big bets on interest rates reaching a range of 3% to 3.25% by the end of the year, putting borrowing costs well in territory. , according to US central bankers, which will dampen growth.

But the measure of inflation monitored more closely by the central bank as a signal of underlying price pressures, known as the core personal consumption expenditure price index, slowed slightly to 5 .2% in March, against 5.3% the previous month. The report, from the Commerce Department, also contained new evidence of a shift toward spending on services that Fed policymakers hope will also ease upward pressure on prices, as spending on durable goods has decreases.

Meanwhile, a separate report showed employers increased benefits to attract historically scarce workers, accelerating the pace of employment cost increases to 4.5% and underscoring the Fed’s view that the labor market is extremely and possibly unhealthy. But private wage growth has stabilized at 5 percent.

The reports “won’t stop the Fed from hiking 50 basis points next week, but they do confirm our view that inflation will fall a bit faster this year than Fed officials now seem to believe.” ‘expect it,” said Andrew Hunter, senior U.S. economist at Capital Economics. .

The Fed, and in particular its leader, Jerome Powell, is taking nothing for granted after being repeatedly burned over the past two years in its assessment of inflationary pressures that have refused to abate as expected.

“We want to see real progress on inflation,” Powell said just over a week ago, citing another round of possible sustained inflationary pressures caused by the war in Ukraine and the recent Covid-19 shutdowns. in China prolonging supply chain issues.

“It may be that the actual peak was in March, but we don’t know so we’re not going to count on that.”

At its policy-making meeting next week, the Fed is expected to raise interest rates half a percentage point higher than usual as it seeks to reduce aggregate demand which has greatly exceeded supply of labor and goods. It is also about to give the green light to start the process of reducing its holdings as another way to tighten financial conditions.

Some analysts took no comfort in either of Friday’s reports, noting that the continued rise in aggregate labor costs fuels fears of a wage-price spiral.

“These readings – which show no signs of easing – will concern policymakers as they make decisions on monetary policy in an environment where the labor market is tight and prices are at a 40-year high,” he said. writes HFE’s Rubeela Farooqi. .

U.S. household sentiment brightened in April, the widely-watched University of Michigan consumer surveys showed on Friday, as gasoline prices fell. But it remained near a decade low, and the specter of sharp Fed rate hikes and what economists say is the growing risk of a resulting recession could weigh in the months ahead.

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