Core Inflation Stays Hot as Fed Eyes Another Rate Hike

Core Inflation Stays Hot as Fed Eyes Another Rate Hike

The personal consumption expenditures price index — often described as the Federal Reserve’s favorite measure of inflation — cooled off a bit in March, dropping to a 4.2% growth rate on an annual basis, down from the upwardly revised 5.1% rate recorded in February, the Bureau of Economic Analysis announced Friday.

The core PCE index, which leaves out volatile food and energy prices and is seen by some economists as a better predictor of future inflation, edged lower by a tenth of a percentage point to 4.6%.

Economist Alex Pelle of Mizuho Americas told CNN that while inflation appears to be moving in the right direction, upward pressure on prices remains sticky. “[Inflation is] coming down very slowly and from a very high level,” he said. “You get a lot of month-to-month volatility, but when you average it out, what you see is that we’re not getting worse, we’re probably getting a little better but not better fast enough for markets and probably not as quickly as the Fed had anticipated a year ago.”

Complicating the picture, a separate report from the Bureau of Labor Statistics shows that wages and benefits continued to grow at a solid clip, rising 1.2% in the first three months of the year, up a tenth of a percentage point from the previous quarter. On a 12-month basis, the compensation index rose 4.8%, stepping back from December’s 5.1% reading but remaining elevated.

“We knew that inflation was going to be rocky and bumpy,” Megan Greene, chief economist for the Kroll Institute, told The New York Times. “We found peak inflation, but it’s not going to be a smooth path down.”

Taken together, the data suggest that inflation will remain above the Fed’s target level of 2% for some time, as widely expected. “Given Friday’s data, in addition to recent data on jobs and growth, we think that the underlying inflation rate will likely remain in the range of 3% to 3.5% through year’s end,” RSM economist Tuan Nguyen said in a research note. Other analysts say it could stay even higher, at or above 4%.

Changing composition of inflation: While inflation is slowly easing, the underlying cause of pricing pressure has changed. As The New York Times’s Jeanna Smialek and Christine Zhang note, during the early days of the Covid-19 pandemic, the demand for goods, along with restrictions in the supply chain, were the main driving force of inflation. Now, however, the demand for goods has eased and supply chains have at least partly returned to normal. Meanwhile, the rising cost of services has taken as the main source of inflationary pressure. (See the chart below.)

As a result, Fed officials are watching service prices very carefully, including things like medical care and home repair. “How quickly those prices — often called ‘core services ex-housing’ — can retreat will determine whether and when inflation can return to normal,” Smialek and Zhang write.

The bottom line: Inflation is cooling but remains high, and the trend suggests it could stick around for a while. Most analysts think the latest batch of data all but guarantees another interest rate hike by the Fed next week as the central bank maintains its battle against inflation, to be followed by a pause during which the interest rates remain high, likely through the end of the year, barring a recession.

Quote of the Day: A ‘Manufactured Crisis’

"We are still waiting for House Republicans to produce a budget. They produced a ransom note. … Understand, this is a manufactured crisis that extreme MAGA Republicans are trying to force on the American people.”

– House Minority Leader Hakeem Jeffries (D-NY), talking to reporters Friday about the debt limit showdown with Republicans, who insist on spending cuts in exchange for increasing the nation’s borrowing authority. Democrats insist that Congress should raise the limit without conditions.

Jeffries noted that the Treasury Department may soon provide an update on the deadline for a debt increase and that clarity around the date will provide some urgency.

Rep. Pramila Jayapal (D-WA), head of the Congressional Progressive Caucus, suggested that such deadline pressure will be necessary: “This is one of those things where you have to get really, uncomfortably close — unfortunately — to the deadline before people really roll up their spikes and decide they’re going to start to move in their position.”

Number of the Day: $247 Billion

Eighteen federal agencies reported roughly $247 billion in improper payments across 82 programs for fiscal year 2022, according to a report released recently by the Government Accountability Office. Nearly 80% of the total came from Medicaid ($81 billion), Medicare ($47 billion), the Paycheck Protection Program ($29 billion), Unemployment Insurance ($19 billion) and the Earned Income Tax Credit ($18 billion). The overall estimate does not include some programs that may be susceptible to improper payments, including the Pandemic Unemployment Assistance program and food stamps.

Administration officials pointed out that “most improper payments are not fraudulent and not all represent a monetary loss to taxpayers.” And Washington Post Columnist Joe Davidson writes that, while the $247 billion total is large and undoubtedly problematic, it also represents a bit of progress. “Surprisingly, that astronomical number represents an improvement from the previous year, when improper payments — which include all those that can’t be properly accounted for — totaled $281 billion,” Davidson says. “That was the most ever recorded since the law began requiring the reporting in fiscal 2003, when $35 billion in improper payments seemed like a lot.”

The White House Office of Management and Budget noted in a blog post late last year that the improper payment rate fell from 7.2% in 2021 to 5.1% in 2022. “But our work isn’t finished,” the post said, “and the data makes clear that Federal agencies have more to do to drive down improper payments in both newer and long-standing programs.”

GAO last week released an updated “High Risk List” of federal government areas that are vulnerable to waste, fraud, abuse and mismanagement or require significant reforms. The list included 37 areas, including three new additions since 2021: the Unemployment Insurance system, the Department of Health and Human Services’ coordination of public health emergencies and federal prison system management. GAO noted that 16 of the 37 areas on its list had shown progress, with two falling off the list completely.

Read more at The Washington Post.

• White House Reiterates Refusal to Negotiate on Debt Limit as Pressure Mounts – New York Times
• Republicans Hope McCarthy's Bill Gives Him Leverage in Debt Ceiling Standoff – NPR
• House GOP Leaves Washington With a Debt Win — but Not Quite a Breakthrough – Politico
• Hakeem Jeffries Blasts House GOP Debt Limit Plan, Wants Real Budget – USA Today
• Common Ground on the Debt Limit? Here’s What to Look For – Roll Call
• Debt Default May Hit Later in Summer as More Tax Revenue Comes In – CNN
• Sinema Says McCarthy's Debt Limit Bill Is a Sign of Progress but Won't Pass Senate – Washington Examiner
• Wages and Prices Slow Unevenly, Reflecting ‘Rocky and Bumpy’ Economy – New York Times
• Worker Pay Is Rising, Complicating the Fed’s Path – Washington Post
• House GOP Tops List of Earmark Seekers Under New Regime – Roll Call
• Kicked Off Medicaid: Millions at Risk as States Trim Rolls – Associated Press
• Lockheed Gets $7.8 Billion F-35 Order to Finish a $30 Billion Mega-Contract – Bloomberg
• Fed Blames Trump-Era Policies, SVB Leaders — and Itself — for Bank’s Stunning Collapse – Politico
• France’s Rating Cut to AA- From AA by Fitch on Deficits, Debt – Bloomberg

• How Congress Is Trying to Finesse The Debt Limit While Ignoring The Debt – Howard Gleckman, Tax Policy Center
• The Real Debt Limit Fight Is Yet to Come – Carl Hulse, New York Times
• House Republicans Want to Balance the Budget on the Backs of America’s Kids – Los Angeles Times Editorial Board
• House Republicans Walk the Plank – Dana Milbank, Washington Post
• In the Debt Ceiling Crisis, Blame the GOP’s So-Called ‘Moderates’ – Steve Benen, MSNBC
• Kevin McCarthy Doubles Down on the Debt Ceiling – Chris Lehmann, The Nation
• The Debt Ceiling Is Entirely Arbitrary — and the GOP Knows It – Hayes Brown, MSNBC
• Republicans Threaten to Tank Economy. Media Blames Biden – Dan Froomkin, Press Watch
• Republican Debt-Limit Rhetoric Isn’t as Potent as It Used to Be – Philip Bump, Washington Post
• America’s Broken Tax System Is Punishing R&D – Bloomberg Editors
• Unpaid-For Tax Cuts Would Be Irresponsible and Hypocritical – Committee for a Responsible Federal Budget
• As Pandemic Experts Leave the White House, Some Worry: What’s Next? – Dan Diamond, Washington Post
• America Pays a High Price for Low Wages – Michael Lind, Wall Street Journal