ACTV - U.S. Inflation Continues To Cool; Is A Fed Rate Pause Next?
2023-05-11 14:17:00 ET
Summary
- U.S. inflation continued to cool in April.
- Federal Reserve may hold rates at next meeting.
- Rate cuts still unlikely this year.
The latest read on U.S. consumer prices shows that inflation continues to cool, but does that mean that the Federal Reserve is at the end of their rate hiking cycle? Thomas Feltmate, Senior Economist at TD discusses with MoneyTalk's Greg Bonnell.
Transcript
Greg Bonnell: The latest read on American consumer prices shows that inflation continues to cool, but does that mean the Federal Reserve is at the end of their rate hiking cycle? Joining us now to discuss, Thomas Feltmate, Senior Economist at TD. Thomas, great to have you back on the show.
Thomas Feltmate: Thanks for having me.
Greg Bonnell: All right. So this is the kind of report that I guess the Fed or even the markets want to see, a continuation of the cooling of inflation. As you look beyond and beneath that headline number, what are you actually seeing at play?
Thomas Feltmate: Yeah. So, we definitely saw a bit of cooling on the year-on-year on the headline measure. Some of that was just due to a pullback in energy prices. We saw food prices flat on the month. Again, these are encouraging signs, but when we kind of strip out those effects and we look at the core measure, we still saw a gain there of 0.4 month-on-month.
And there was a few encouraging signs that we could point to. When we saw the shelter gains, they definitely continued to slow in April. So, that's encouraging. March, April now have showed some pullback relative to the stronger prints that we were seeing earlier last year.
And it kind of aligns to the narrative that we've been telling that shelter costs in the US, when we look at market-based measures of rent, have already peaked last year. And there was going to be some kind of lag in terms of when we actually see that show up in the inflation data. And that's what we've kind of seen over the last couple of months. So, certainly encouraging.
But then on the good side of things, late last year, we were seeing a lot of signs of deflation there. But now over the last two months, core goods have again contributed positively to inflation. So, a lot of that had to do from just kind of a one-off sharp increase in used vehicle prices.
So, if we strip that out, core goods were flat. And then outside of that, when we look at non-housing services, again, some moderation there, but it's only started over the last month or so. So, it's still too early to say definitively whether or not we are seeing a cooling on the core measure or if these are just kind of one-off effects.
Greg Bonnell: Does this suggest that the last mile, as they often say, will be the hardest mile? It was one thing to bring it down from like 7%, 8% handles to get below -- slightly below 5% here today, to get it back to 2%. Is this going to be a much tougher battle?
Thomas Feltmate: I think getting back to 4% by the end of this year is very, very conceivable. But to your point, that last kind of move down from the 3.5% down to 2% is certainly going to be where we see a lot more stickiness coming through, particularly on the service side of things.
Greg Bonnell: What would the Fed make of it? Because after the rate hike of last week, I mean, Chair Powell was very careful not to say that we're on pause or this. They just think -- but they sort of laid the groundwork that they could be depending on the data at the end of their rate hiking cycle. What does a print like this sort of tell us about what the Fed might be thinking?
Thomas Feltmate: I think it kind of confirms what they were hinting at, where they're basically reaching a point where they're comfortable with the degree of restriction that's in the economy today, but they also left the door open to future rate hikes if we continue to see the economic data surprise to the upside.
On the inflation numbers this morning, very, very early signs that we are seeing some cooling. So, I think that kind of works in their favor, but if we look back at last week's reading on employment where we saw the US economy add over 250,000 jobs in April, things are still running at well above trend pace right now.
And it suggests that we could see a bit stronger push come through on the price side of things. So, I think they're comfortable right now, but if we continue to see upside surprises in the economic data, they've definitely left the door open to another hike in June.
Greg Bonnell: Now, pause is one thing. Possibility of another hike if the data pushes them in that direction. But then you have certain pockets of the market, I'm thinking fixed income, that are actually starting to price in cuts, as early as, so I guess -- it was the summer, I think it might have been pushed back to the fall, but still within the remainder of this year. Is that a little too optimistic?
Thomas Feltmate: I think so at this point. Certainly, we know that there's a lot of stickiness on the inflation side of things and just given the strength that we're still seeing in the labor market, I think it would be optimistic to say that come fall this year, the Fed would feel comfortable to start kind of easing back on the policy rate, particularly just given the trajectory that we're still seeing on the inflation data, very, very early signs of cooling, a lot of strength still in the labor market. I think our opinion is certainly that's a bit premature at this point.
Greg Bonnell: Now, in this country, we have been on pause with our central bank for a little while now. But the same thing, if the data tells us that we've got to move again, we'll move again. What's the most likely scenario in Canada going forward?
Thomas Feltmate: I think it's a very similar story. We got the April jobs numbers last week as well. And they came in well above consensus, just like the US. We're still seeing a lot of underlying momentum coming through on the hiring side of things. Those higher frequency reads that we're seeing on consumer spend data continue to point to some near-term acceleration in spending activity.
So this kind of works against where policymakers are trying to get the economy. So ultimately, that means rates need to stay elevated for longer. So certainly through this year, we have both the Bank of Canada and the Federal Reserve kind of maintaining the policy rate where it is today.
Greg Bonnell: I've had some discussions where it suggested, and there's conversations you're seeing out there on market pundits that if they can get it down to around 3%, they are going to be happy enough. I mean, the target is 2%. And then there's a range on either side. Do they have to -- to keep the confidence, I guess, of the consumer, to anchor inflation expectations, do they really have to wrestle it down to that sweet spot of 2% or can they run a little hot and still be all right?
Thomas Feltmate: I mean, certainly this is a question that policymakers have been asked over the last year or so. And what we've heard from Chair Powell is that 2% is their mandate. And that's what they're targeting. So at all costs, that's what they're trying to get inflation back to. Which again, probably argues that rates need to stay higher for longer relative to what markets are currently building in.
Greg Bonnell: The whole point of this, obviously, to cool inflation. And I guess the thinking is, you can't cool inflation without cooling the economy to a certain degree. And we're seeing strength in the labor market. The consumer is holding up. Where do the cracks need to be for the central banks to think, OK, this is working? Headline is one thing, but the robust demand for labor, people are still getting raises. That all seems to be working against each other.
Thomas Feltmate: Yeah, I would agree with that. I think we're still seeing a lot of strength in the labor market. You know, that said in the US, there's definitely some cracks starting to emerge, I would say. We look at job openings, for example, they have come in over the last year or so. They've fallen from about 10 million, 11 million down to closer to 9.6 million.
So, that's meaningful. However, they're still elevated by a historical standpoint. When we look at continued jobless claims, they've started to edge higher. Again, this is another sign that things are starting to ease a bit. Right now, if we look at where they're sitting, they're above the 2019 average.
So again, another encouraging sign that things are starting to cool, but it's on the margin right now. The labor market still remains historically tight and we're seeing that come through on the wage side of things, where wage growth is still well above what would be consistent with inflation running closer to 2%.
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U.S. Inflation Continues To Cool; Is A Fed Rate Pause Next?