PPI, inflation, and a booming economy break dreams of early rate cuts

Lorenzo Bagnato

19 February 2024 - 21:59

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The latest PPI, inflation, and GDP readings prove the Federal Reserve should not cut rates too early.

PPI, inflation, and a booming economy break dreams of early rate cuts

The US Producer’s Price Index (PPI) rose more than expected in data published later last week. This was the latest of several worse-than-expected economic indicators in February, measuring the state of the US economy at the beginning of the year.

Specifically, the PPI in the United States rose by 0.3% month-on-month, compared to the 0.1% expected. This was the largest rise in five months, mostly driven by food and energy. Core PPI, on the other hand, increased by a smaller 0.1%.

The PPI measures prices for producers, as opposed to the Consumer’s Price Index (CPI) which also rose more than previously forecasted. Inflation in the United States cooled to 3.1% in January, more than expected.

Following the PPI and CPI reports, economists believe revised inflationary data will present a gloomier picture for January. Especially as unemployment in the US keeps decreasing and GDP keeps increasing.

In the last quarter of 2023, GDP in the United States rose by 3.3%, doubling market expectations. According to Atlanta’s Federal Reserve, Gross Domestic Product in the first quarter of 2024 will increase by 3.4%. According to the data, consumer spending is the main driver of GDP, which is also believed to bring inflation up.

What’s next for the American economy

January was a bad month for American economists and investors who expected early rate cuts in 2024. "The Fed isn’t losing the inflation fight, but they aren’t winning either," said chief economist at FWDBONDS Christopher Rupkey.

The Federal Reserve has no incentive to cut rates in March, April, and likely even June. Inflation is far from a clear path towards the target, and the economy is blooming.

At the beginning of the year, markets were pricing in a cut in March. Subsequently, US markets went on an unprecedented rally. The S&P 500 broke historic highs, also led by a continued AI craze.

Now, no analyst or expert expects such early cuts. At the earliest, the pivot is set to occur in July, giving a positive signal to markets ahead of the November election.

However, the recent data suggests inflation may be on the rise. CPI and PPI are traditionally higher in January when firms recalculate prices. However, they could also provide a push for future raises, reinitiating a vicious cycle and restarting the Fed’s hikes.

The only good thing is that a recession is out of the table. Although most economic indicators (except for one) paint a positive picture regarding economic contraction, it may also be counter-productive for the Fed’s work.


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