Inflation takes center stage this week amid a mix of significant economic reports that will tell much about the strength of the U.S. economy and the path of interest rates.
First up on Tuesday is the January consumer price index. The most common measure of inflation, the CPI is expected to have fallen to 2.9% annually from 3.4% while the core CPI, excluding food and energy costs, is forecast to have declined to a 3.7% rate from 3.9% in December.
The wholesale counterpart – the producer price index – is set to be released Friday with estimates for a negligible monthly increase in the overall index and the annual level of the core index dipping to 1.7% from 1.8% previously.
Year-end revisions to 2023 CPI data, released last Friday, showed inflation was actually slightly lower on a monthly basis in December than earlier estimated.
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“Core inflation rates have generally been on a downward trend for a while now,” said BeiChen Lin, investment strategy analyst at Russell Investments. “But ‘generally’ doesn’t necessarily mean linear or consistent – there could very well be bumps ahead.”
“Core inflation today is being primarily driven by shelter and wage-sensitive core services,” Lin added. “A well-documented lag between market rent prices and CPI rent measures suggests that we should see further easing in shelter inflation in 2024.”
But, he cautioned, “The core services side of the puzzle, however, might be trickier. Although wage inflation rates have generally been moderating, an unexpected repeat of the blockbuster January job creation in subsequent months could cause wage pressures to persist for longer than previously anticipated, ultimately delaying progress on core services inflation.”
Economists are generally seeing stronger growth in 2024 than they predicted just a few months ago. The Blue Chip Economic Indicators monthly survey for February found 87% of respondents expecting the U.S. economy to achieve a soft landing, up from 74% last month and 67% in December.
The panel of top economists now puts the odds of a recession in the next 12 months at 36% compared with 42% last month and 61% in May. Meanwhile, the Federal Reserve Bank of Atlanta’s GDPNow model has the economy growing at a 3.4% annual rate in the first quarter.
Headier growth could mean prices will take longer to revert back to the 2% annual inflation target set by the Federal Reserve. Some measure of the strength of the consumer will come on Thursday with the retail sales report for January. After a strong run-up to Christmas, projections are for spending to have cooled off.
“Easier financial conditions, rising home prices, rebounding consumer sentiment, and a stabilization in manufacturing activity all augur well for near-term US growth prospects,” BCA Research wrote on Friday. The firm reduced its odds of a recession starting in the first half of the year to 10% from 25% previously, and to 40% in the second half from 50% before.
Fed Chairman Jerome Powell poured some cold water on the idea of a rate cut next month when he addressed reporters following the January meeting of the central bank’s policymaking committee. The market has shifted its expectations to a cut in May, with anywhere from three to six cuts priced in this year depending on the direction of the economy.
“There is some justification for keeping rates high,” says David Andolfatto, chair of the economics department at the University of Miami and a former top official at the Federal Reserve Bank of St. Louis. “I am a little bit worried about inflation going forward.”
The week ends with housing data for January on Friday, with both starts and building permits expected to be flat and slightly down, respectively. The day also brings the first reading on consumer sentiment for February from the University of Michigan’s key index. After a strong bounce upward in January, economists are looking for a continuation of the improving trend.
Still, January data can often be affected by issues like bad weather and the trend of consumers to pull in their horns after the Christmas spending frenzy. This time could be no different, said Comerica Bank economists Bill Adams and Waran Bhahirethan.
“January’s activity indicators will likely be messy, disrupted by weather-related closures of many schools and businesses,” they wrote on Sunday. “Retail sales and housing starts will likely be soft; these indicators often weaken during bad weather and bounce back the next month.
“Building permits, homebuilder sentiment, and consumer sentiment will likely perform better, buoyed by improving economic headlines and the stock market’s record high.”