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Surging inflation fears sent markets tumbling and Fed officials scrambling

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A sign advertising units for rent is displayed outside of a Manhattan building on April 11, 2024 in New York City.

Spencer Platt | Getty Images

The early data is in for the path of inflation during the first three months of 2024, and the news so far is, well, not good.

Pick your poison. Whether it’s prices at the register or wholesale input costs, while inflation is off the blistering pace of 2022, it doesn’t appear to be going away anytime soon. Future expectations also have been drifting higher.

Investors, consumers and policymakers — even economists — have been caught off guard with just how stubborn price pressures have been to start 2024. Stocks slumped Friday as the Dow Jones Industrial Average coughed up nearly 500 points, dropping 2.4% on the week and surrendering nearly all its gains for the year.

“Fool me once, shame on you. Fool me twice, shame on me,” Harvard economist Jason Furman told CNBC this week. “We’ve now had three months in a row of prints coming in above just about what everyone expected. It’s time to change the way we think about things going forward.”

No doubt, the market has been forced to change its thinking dramatically.

Fed can't argue against three hotter-than-expected inflation reports, says Fundstrat's Tom Lee

Even import prices, an otherwise minor data point, contributed to the narrative. In March, it posted its biggest increase for a three-month period in about two years. All of it has amounted to a big headache for markets, which sold off through most of the week before really hitting the skids Friday.

As if all the bad inflation news wasn’t enough, a Wall Street Journal report Friday indicated that Iran plans to attack Israel in the next two days, adding to the cacophony. Energy prices, which have been a major factor in the past two months’ inflation readings, pushed higher on signs of further geopolitical turmoil.

“You can take your pick. There’s a lot of catalysts” for Friday’s sell-off, said market veteran Jim Paulsen, a former strategist and economist with Wells Fargo and other firms who now writes a blog for Substack titled Paulsen Perspectives. “More than anything, this is really down to one thing now, and it’s the Israel-Iran war if that’s going to happen. … It just gives you a great sense of instability.”

High hopes dashed

In contrast, heading into the year markets saw an accommodative Fed poised to cut interest rates early and often — six or seven times, with the kickoff happening in March. But with each months’ stubborn data, investors have had to recalibrate, now anticipating just two cuts, according to futures market pricing that sees a non-zero probability (about 9%) of no reductions this year.

“I’d love the Fed to be in a position to cut rates later this year,” said Furman, who served as chair of the Council of Economic Advisers under former President Barack Obama. “But the data is just not close to being there, at least yet.”

This week was filled with bad economic news, with each day literally bringing another dose of reality about inflation.

It started Monday with a New York Fed consumer survey showing expectations for rent increases over the next year rising dramatically, to 8.7%, or 2.6 percentage points higher than the February survey. The outlook for food, gas, medical care and education costs all rose as well.

On Tuesday, the National Federation of Independent Business showed that optimism among its members hit an 11-year low, with members citing inflation as their primary concern.

Wednesday brought a higher-than-expected consumer price reading that showed the 12-month inflation rate at 3.5%, while the Labor Department on Thursday reported that wholesale prices showed their biggest one-year gain since April 2023.

Finally, a report Friday indicated that import prices rose more than expected in March and notched the biggest three-month advance since May 2022. On top of that, JPMorgan Chase CEO Jamie Dimon warned that “persistent inflationary pressures” posed a threat to the economy and business. And the University of Michigan’s closely watched consumer sentiment survey came in lower than expected, with respondents pushing up their inflation outlook as well.

Still ready to cut, sometime

Fed remains in focus for venture capital investors after strong CPI report

While consumer and producer price indexes captured the market’s attention this week, it’s worth remembering that the Fed’s attention is elsewhere when it comes to inflation. Policymakers instead follow the personal consumption expenditures price index, which has not been released yet for March.

There are two key differences between the CPI and the PCE indexes. Primarily, the Commerce Department’s PCE adjusts for changes in consumer behavior, so if people are substituting, say, chicken for beef because of price changes, that would be reflected more in PCE than CPI. Also, PCE places less weighting on housing costs, an important consideration with rental and other shelter prices holding higher.

In February, the PCE readings were 2.5% for all items and 2.8% ex-food and energy, or the “core” reading that Fed officials watch more closely. The next release won’t come until April 26; Citigroup economists said that current tracking data points to core edging lower to 2.7%, better but still a distance from the Fed’s goal.

Adding up the signals

Moreover, there are multiple other signals showing that the Fed has a long way to go.

So-called sticky price CPI, as calculated by the Atlanta Fed, edged up to 4.5% on a 12-month basis in March, while flexible CPI surged a full percentage point, albeit to only 0.8%. Sticky price CPI entails items such as housing, motor vehicle insurance and medical care services, while flexible price is concentrated in food, energy and vehicle prices.

Finally, the Dallas Fed trimmed mean PCE, which throws out extreme readings on either side, to 3.1% in February — again a ways from the central bank’s goal.

A bright spot for the Fed is that the economy has been able to tolerate high rates, with little impact to the employment picture or growth at the macro level. However, there’s worry that such conditions won’t last forever, and there have been signs of cracks in the labor market.

“I have long worried that the last mile of inflation would be the hardest. There’s a lot of evidence for a non-linearity in the disinflation process,” said Furman, the Harvard economist. “If that’s the case, you would require a decent amount of unemployment to get inflation all the way to 2.0%.”

That’s why Furman and others have pushed for the Fed to rethink it’s determined commitment to 2% inflation. BlackRock CEO Larry Fink, for instance, told CNBC on Friday that if the Fed could get inflation to around 2.8%-3%, it should “call it a day and a win.”

“At a minimum, I think getting to something that rounds to 2% inflation would be just fine — 2.49 rounds to two. If it stabilized there, I don’t think anyone would notice it,” Furman said. “I don’t think they can tolerate a risk of inflation above 3 though, and that’s the risk that we’re facing right now.”

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Will Elon Musk’s cash splash pay off in Wisconsin?

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TO GET A sense of what the Republican Party thinks of the electoral value of Elon Musk, listen to what Brad Schimel, a conservative candidate for the Supreme Court of Wisconsin, has to say about the billionaire. At an event on March 29th at an airsoft range (a more serious version of paintball) just outside Kenosha, five speakers, including Mr Schimel, spoke for over an hour about the importance of the election to the Republican cause. Mr Musk’s political action committees (PACs) have poured over $20m into the race, far more than any other donor’s. But over the course of the event, his name came up precisely zero times.

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Economics

German inflation, March 2025

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Customers shop for fresh fruits and vegetables in a supermarket in Munich, Germany, on March 8, 2025.

Michael Nguyen | Nurphoto | Getty Images

German inflation came in at a lower-than-expected 2.3% in March, preliminary data from the country’s statistics office Destatis showed Monday.

It compares to February’s 2.6% print, which was revised lower from a preliminary reading, and a poll of Reuters economists who had been expecting inflation to come in at 2.4% The print is harmonized across the euro area for comparability. 

On a monthly basis, harmonized inflation rose 0.4%. Core inflation, which excludes food and energy costs, came in at 2.5%, below February’s 2.7% reading.

Meanwhile services inflation, which had long been sticky, also eased to 3.4% in March, from 3.8% in the previous month.

The data comes at a critical time for the German economy as U.S. President Donald Trump’s tariffs loom and fiscal and economic policy shifts at home could be imminent.

Trade is a key pillar for the German economy, making it more vulnerable to the uncertainty and quickly changing developments currently dominating global trade policy. A slew of levies from the U.S. are set to come into force this week, including 25% tariffs on imported cars — a sector that is key to Germany’s economy. The country’s political leaders and car industry heavyweights have slammed Trump’s plans.

Meanwhile Germany’s political parties are working to establish a new coalition government following the results of the February 2025 federal election. Negotiations are underway between the Christian Democratic Union, alongside its sister party the Christian Social Union, and the Social Democratic Union.

While various points of contention appear to remain between the parties, their talks have already yielded some results. Earlier this month, Germany’s lawmakers voted in favor of a major fiscal package, which included amendments to long-standing debt rules to allow for higher defense spending and a 500-billion-euro ($541 billion) infrastructure fund.

This is a breaking news story, please check back for updates.

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Economics

First-quarter GDP growth will be just 0.3% as tariffs stoke stagflation conditions, says CNBC survey

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U.S. President Donald Trump speaks to members of the media aboard Air Force One before landing in West Palm Beach, Florida, U.S., March 28, 2025. 

Kevin Lamarque | Reuters

Policy uncertainty and new sweeping tariffs from the Trump administration are combining to create a stagflationary outlook for the U.S. economy in the latest CNBC Rapid Update.

The Rapid Update, averaging forecasts from 14 economists for GDP and inflation, sees first quarter growth registering an anemic 0.3% compared with the 2.3% reported in the fourth quarter of 2024. It would be the weakest growth since 2022 as the economy emerged from the pandemic.

Core PCE inflation, meanwhile, the Fed’s preferred inflation indicator, will remain stuck at around 2.9% for most of the year before resuming its decline in the fourth quarter.

Behind the dour GDP forecasts is new evidence that the decline in consumer and business sentiment is showing up in real economic activity. The Commerce Department on Friday reported that real, or inflation-adjusted consumer spending in February rose just 0.1%, after a decline of -0.6% in January. Action Economics dropped its outlook for spending growth to just 0.2% in this quarter from 4% in the fourth quarter.

“Signs of slowing in hard activity data are becoming more convincing, following an earlier worsening in sentiment,” wrote Barclays over the weekend.

Another factor: a surge of imports (which subtract from GDP) that appear to have poured into the U.S. ahead of tariffs.

The good news is the import effect should abate and only two of the 12 economists surveyed see negative growth in Q1. None forecast consecutive quarters of economic contraction. Oxford Economics, which has the lowest Q1 estimate at -1.6%, expects a continued drag from imports but sees second quarter GDP rebounding to 1.9%, because those imports will eventually end up boosting growth when they are counted in inventory or sales measures.

Recession risks rising

On average, most economists forecast a gradual rebound, with second quarter GDP averaging 1.4%, third quarter at 1.6% and the final quarter of the year rising to 2%.

The danger is an economy with anemic growth of just 0.3% could easily slip into negative territory. And, with new tariffs set to come this week, not everyone is so sure about a rebound.

“While our baseline doesn’t show a decline in real GDP, given the mounting global trade war and DOGE cuts to jobs and funding, there is a good chance GDP will decline in the first and even the second quarters of this year,” said Mark Zandi of Moody’s Analytics. “And a recession will be likely if the president doesn’t begin backtracking on the tariffs by the third quarter.”

Moody’s looks for anemic Q1 growth of just 0.4% that rebounds to 1.6% by year end, which is still modestly below trend.

Stubborn inflation will complicate the Fed’s ability to respond to flagging growth. Core PCE is expected at 2.8% this quarter, rising to 3% next quarter and staying roughly at that level until in drops to 2.6% a year from now.

While the market looks to be banking on rate cuts, the Fed could find them difficult to justify until inflation begins falling more convincingly at the end of the year.

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