Sticky Inflation Raises Odds of Recession

A somber Friday as the world marks the one-year anniversary of the Russian invasion of Ukraine. The leaders of the Group of Seven nations released a statement saying they are committed “to intensifying our diplomatic, financial and military support for Ukraine,” adding that they would continue to assist the country “for as long as it takes” to end the war.

In more upbeat news closer to home, the first game of spring training took place in the Cactus League Friday, with the San Diego Padres hosting the Seattle Mariners. Baseball fans are watching closely as MLB rolls out a new package of rules this year, including a pitch clock, larger bases and limitations on defensive shifts. The Grapefruit League gets started Saturday.

Here’s what else is happening:

Sticky Inflation Challenges the Fed – and Raises the Odds of Recession

The personal consumption expenditures index rose 0.6% from December to January, the Bureau of Labor Statistics said Friday, raising new concerns about the persistence of inflation in the U.S. economy.

Closely watched by the Federal Reserve, the PCE index rose 5.4% on a 12-month basis. Both the monthly and yearly readings exceeded economists’ expectations, with the monthly number showing a particularly sharp increase. The core PCE index, which excludes volatile food and energy prices, also increased more than expected, rising 0.6% on a monthly basis and 4.7% on an annual basis.

The report dashed hopes that inflation is declining steadily and suggests that the Federal Reserve has a long way to go in its battle to push inflation back down toward its pre-pandemic level closers to 2%.

“Today’s report shows we have made progress on inflation, but we have more work to do,” President Biden said in a statement.

What the experts are saying: Stocks tumbled Friday as investors took in the hotter-than-expected inflation data, and many analysts said the report likely means the Fed will have to raise its key interest rate higher and keep it high longer than previously expected, increasing the risk of recession.

“The likelihood of achieving a soft landing dips, with the risk of no-landing potentially forcing the Fed to push rates higher and hold longer, with greater risk that this ultimately pushes the economy into a mild recession,” said Evercore’s Krishna Guha, per Bloomberg.

Tuan Nguyen, an economist at RSM, said the latest inflation report suggests that the Fed will raise rates at least three more times, with a potential peak rate of 5.5%. “Rising prices and spending indicated that overall demand remained robust, which does not offer the Federal Reserve any relief because it is trying to target demand,” he wrote. “While we have passed the worst of inflation, the sharp rebound in January serves as a reminder that the road to the Fed’s 2% goal will be long and bumpy.”

Soft landing unlikely? A recent paper written by a group of economists including Michael Feroli, chief U.S. economist at JPMorgan, and Frederic Mishkin, a former Federal Reserve governor, found that over the last 70 years, when central banks raise interest rates to combat high inflation, recession is the all-but-inevitable result.

“There is no post-1950 precedent for a sizable ... disinflation that does not entail substantial economic sacrifice or recession,” the paper says.

In a review of the research, which was discussed at a meeting of Fed officials Friday, Christopher Rugaber of the Associated Press said the “paper coincides with a growing awareness in financial markets and among economists that the Fed will likely have to boost interest rates even higher than previously estimated.”

Still, some Fed officials hold out hope that this time may be different. “History is useful, but it can only tell us so much, particularly in situations without historical precedent,” Philip Jefferson, a member of the Fed’s Board of Governors, said Friday.

Another $2 Billion in Military Aid for Ukraine

On the anniversary of the Russian invasion, the Department of Defense on Friday announced a new $2 billion aid package for Ukraine that includes ammunition, drones and mine-clearing equipment.

Here’s the Pentagon’s list of the supplies and equipment being sent to Ukraine:

•    Additional ammunition for High Mobility Artillery Rocket Systems (HIMARS);

•    Additional 155mm artillery rounds;

•    Munitions for laser-guided rocket systems;

•    CyberLux K8 Unmanned Aerial Systems (UAS);

•    Switchblade 600 UAS;

•    Altius-600 UAS;

•    Jump 20 UAS;

•    Counter-UAS and electronic warfare detection equipment;

•    Mine clearing equipment;

•    Secure communications support equipment;

•    Funding for training, maintenance, and sustainment.

The latest round of assistance brings the total for direct military aid supplied by the U.S. to Ukraine to $32 billion, according to the Associated Press, with tens of billions more in the pipeline. Overall, including defense and non-defense aid, Congress has approved more than $100 billion in assistance for Ukraine, with one analysis putting the total at about $113 billion so far.

Quote of the Day: Incentives Working

“What it’s done is it’s stimulated a huge wave of new capacity building in the U.S. for EVs and EV materials and batteries. I used to be a skeptic about the practicalities of bringing manufacturing back to the U.S. Now that I see the impact of the IIJA and Inflation Reduction Act my observation is, well, that seems to be working.”

— Willy Shih, a manufacturing expert at Harvard Business School, talking to The Washington Post about how electric automakers are responding to incentives provided in the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. Audi announced Friday that is considering building a new factory in the U.S. to produce electric cars. “The German carmaker joins a string of manufacturers of cars, computer chips, batteries and solar panels that have announced concrete plans or tentative prospects for boosting U.S. production, all drawn at least in part by subsidies and tax breaks rolled out in White House-backed legislation,” the Post’s Jeanne Whalen and Aaron Gregg write.