Worse than expected. And with a very significant underlying persistence. US inflation for January is recorded at +6.4% on an annual basis and at +0.5% on a seasonally adjusted monthly basis. The picture outlined by the US Bureau of Labor Statistics (BLS) suggests that new interest rate hikes by the Federal Reserve will be necessary. The annual figure is higher than the consensus of analysts gathered by Bloomberg, which forecast a 6.2 percent increase. What is worrying is the Core inflation figure, the underlying one, which excludes food and energy, which according to the BLS “increased by 0.4% in January”. And it could remain at high levels for the whole of 2023 and a good part of next year. The unknown, as also remarked by the managing director of Goldman Sachs, David Solomon, is given by China. With the farewell to the policy of restrictions to stem the Covid-19, Beijing’s demand for energy and raw materials could keep inflation elevated for a long time.
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The words of US President Joe Biden commenting on the latest inflation reading are clear. And they best represent the state of the US economy. The recession is less scary than a few months ago, employment is at relevant levels, Wall Street continues to surprise positively, but the flare-ups in prices continue to be too volatile and long-lasting. “Inflation in America continues to fall, and this is good news for families and businesses across the country,” said a statement from the White House. However, according to Biden, “there is still a lot of work to be done in the transition to more stable and constant growth, and there could be setbacks along the way.” Among the categories that increased in January are “the consumer staples, motor vehicle insurance, recreation, apparel and home furnishings indices.” The auto and truck indices used goods, medical care and airline tickets, on the other hand, have decreased. Food continues to pose a threat to deflation, which however according to Fed head Jerome Powell, has already begun. After all, the contraction of the index general, as recalled by the note from the White House, has been constant for seven consecutive months, even if the road remains bumpy.
The great unknown is given by future scenarios. And the fear, as highlighted by Biden, is that of a flare-up of the tensions that between 2021 and 2022 were observed on the production and logistics chains. “My goal is to continue to reduce costs for households, rebuild our supply chains, and invest in America,” Biden noted. The reference to China is clear, which is reopening itself to the world. A danger for the persistence of the phenomenon which is weakening the purchasing power of households and businesses. “Inflation is normalizing but it will come down slowly,” and “it will take time to hit the target,” Fed member Thomas Barkin said in an interview with Bloomberg, commenting on today’s data, which he defined as “ expected”. Then the mantra, which is similar to Powell’s: “What we don’t want is the persistence of high inflation”. “If it stays above the target, we will have to do more”, assured Barkin, who on the central bank America is one of the most influential members. Translated, new hikes are on the way, and for a still undefined time horizon. Because, as Powell explained during the press conference following the interest rate decision in early February, the primary objective and a priority is to ensure a reduction of the burden dictated by soaring prices.
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Analysts, who just a few days ago celebrated the hypothesis that the increases in the cost of money would have been interrupted, suddenly changed their opinion. “For Fed members, this slow decline in inflation justifies the idea of keeping rates higher for longer,” said Rubeela Farooqi, chief economist at the HFE. She echoes Eric Winograd, director of economic research at AllianceBernstein. “The data, combined with revisions in recent months, indicate that the core CPI is progressing at a slower pace than during the period when fears were greatest, but it is not yet close to the Fed’s target, nor in the short term. nor in the long term,” emphasizes Winograd. “This causes the Fed to continue its course of rate hikes into March, and based on available information, a May rate hike looks more likely than not.” Then the admission: “I believed that the hike in March would be the last, with a policy rate of 4.75%-5.0% sufficient to contain inflation. However, since the Fed signaled a slower pace of hikes late last year, financial conditions have eased significantly. Paradoxically, explains Winograd, “the easing of conditions due to the fact that the market has priced a more dovish path has probably forced the Fed to adopt a more hawkish behavior, strengthening growth prospects and slowing the disinflation process. As a result, it is likely that the Fed will not stop there and proceed with the hikes in both March and May. And another economist also agrees. “If the rate of decline of inflation remains unchanged, with these revisions it will take longer to reach the Federal Reserve’s 2% inflation target,” remarked John Lloyd, Multi-Sector Credit Strategies Portfolio Manager at Janus Henderson. “ This corroborates the Federal Reserve’s case for a longer-term rate hike.Today’s data should not materially change the Federal Reserve’s assumption of at least two more 25 basis point rate hikes, currently priced in the forward market”, Lloyd reiterates. The time for a reverse gear, for the Fed, has not yet arrived.