Federal Reserve Silent Amid Trump’s Inflation Concerns

TFD – Dive into the Federal Reserve’s silence amidst Trump’s inflation concerns and the latest data on price growth and consumer costs. Understand the economic implications and how it may affect you.

According to a study released by the Bureau of Labor Statistics on Tuesday, 12.-month rise in U.S. prices decreased in January, falling from 3.4% to 3.1%.

When food and petrol costs are taken out of the equation, “core” price rise was 3.9%, unchanged from December.

Although price inflation did continue to decline last month, the January statistics fell short of forecasts for a more significant slowdown: Economists surveyed prior to the release anticipated a reading of 2.9%. They also expected a lower reading for the “core” reading, at 3.7%.

“The final mile towards the Fed’s 2% target was always going to be slow, erratic, and frustrating,” wrote Seema Shah, chief global strategist at Principal Asset Management, in a note to clients following the report’s release. “Today’s data is not what markets or the Fed would have liked to see, but it’s important not to overreact and jump to the assumption that an inflationary resurgence is developing.”

The information revealed an unanticipated rise in housing expenses, which comprise both rent and property ownership. In the course of a year, these increased by more than 6%.

Paul Ashworth, the chief U.S. economist at Capital Economics research firm, stated in a letter to clients that these rises are unlikely to last given more recent data on rent growth.

“The economy still has a lot of disinflation,” Ashworth stated.

However, Tuesday’s data is yet another indication that high levels of inflation are still present in some areas of the American economy.

Even while the rate of 12-month price hikes has decreased from the nearly double-digit highs attained in the summer of 2022, costs for American consumers have increased relative to those before to the pandemic.

Economists generally concur that these higher price levels are probably here to stay, with a few notable exceptions. How soon price growth for consumer goods and services will slow down is the subject at hand.

high ability to tolerate costs

Nevertheless, it seems like customers are getting used to the new normal of increasing costs. Recently, NBC News reported on how the price of fast food has increased in the post-pandemic era, despite it being generally viewed as a cheap alternative to fine dining.

In a conference call with analysts last week, McDonald’s CEO Chris Kempczinski stated, “Eating at home has become more affordable,” adding that customers paying $45,000 or less year were exhibiting a special level of price awareness. “That low-income consumer is undoubtedly the front line of battle.”

The price growth of food at home has sharply slowed down after a sharp spike at the start of the conflict in Ukraine, reaching just 1.3% on a 12-month basis in December.

In contrast, the cost of eating out has increased; in December, it increased by little over 5% over a 12-month period.

The cost of food has increased by the same 25% in both categories since the pandemic began, notwithstanding the recent discrepancy. This explains why consumer confidence has been slow to recover in the post-pandemic era and why aggregate scores are still below pre-pandemic levels.

Regarding Tuesday’s report, analysts predict that although it will probably indicate a slight improvement in the direction of the Federal Reserve’s official target of 2% annual inflation, strong economic growth will likely maintain the rate of price increases at a high level.

In a note to clients on Monday, Citibank analysts stated, “We continue to see the path back to 2-percent inflation as challenging, absent a more significant loosening in the labor and housing markets.”

In other words, slower price growth could come at the cost of higher unemployment.

However, given wage and house price rises that are still high, price growth might be trapped over the 2% target in the absence of a contracting labor market, according to Citi analysts.

Be quick and patient.

Lower interest rates might not show up until late spring or early summer if that is the case. Jerome Powell, the chair of the Federal Reserve, stated in his most recent speech that he would need to see more assurance that inflation was significantly slowing down. Powell said that it was very improbable that interest rates will be lowered in March.

The Fed’s next chance to declare a rate reduction after March would be on May 1. However, according to the Citi analysts, the first rate cut might not happen until after that, in June.

According to Bank of America analysts, June is also the most likely month for the first rate reduction since the pandemic’s end. They stated in a note to clients on Monday that while January’s data won’t be decisive on its own, it will assist Fed officials in assembling a case for a rate drop in June.

President Joe Biden continues to be the biggest political casualty of rising prices. Regarding which presidential candidate would manage the economy better, Biden’s main rival among Republicans, former President Donald Trump, led by 22 points in the most recent NBC News poll, with 33% selecting Biden and 55% selecting Trump.

In a different survey conducted last month, Harvard CAPS-Harris discovered that while respondents still ranked inflation as their top concern, immigration had overtaken it.

During the weekend, Biden urged businesses to stop the practice of “shrinkflation,” in which they charge the same prices for items that are smaller in size. Sen. Bob Casey, a Democrat from Pennsylvania, presented a report stating that the cost per unit of household paper goods had increased by 34.9% since January 2019. The research also stated that manufacturers had reduced the sizes of rolls and packages, accounting for about 10.3% of the rise.

Regarding Trump’s proposed approach to addressing inflation, economists from both the liberal and conservative camps argue that certain of his ideas, such as raising import duties and restricting immigration, may even rekindle the inflationary trend. In addition, Trump pledged to remove Powell from his position as chairman of the Federal Reserve, citing his unfounded belief that Powell would try to “help the Democrats” by lowering interest rates ahead of the November 2024 election. Powell was Powell’s nominee when Trump was president in 2017.

The Federal Reserve has always aimed to shield itself from political pressure, therefore it remained silent in response to Trump’s statements.