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Inflation Watch: Milder CPI Growth as Fed Tightens Policy and Global Factors Weigh In

Summary

  • Four Fed bank boards wanted different policy decision ahead of March hike
  • Traders a tad less sure of Fed May rate hike as minutes show split
  • Slowing US inflation shifts investor focus to earnings season
  • G7 finance leaders pledge financial stability, supply chain diversity
  • New BOJ chief vows to keep stimulus, shuns premature tightening
  • North Korea fires missile, prompts Japan alert, evacuations, South condemns provocation
  • Japanese sell net Y788.8 bln foreign bonds, buy Y28.2 bln stocks, Y73.2 bln bills Apr 8 wk
  • SoftBank to sell nearly all its stake in Alibaba – FT
  • China’s exports stun with surprise surge on EV boom
  • Ethereum’s first major upgrade since Merge is complete- Binance

The Inflation News:

On April 12th, the US Labor Department released the March Consumer Price Index report, which showed that U.S. consumer prices rose by only 0.1%, slightly lower than the expected 0.2%. While gasoline prices fell by 4.6%, high rents continued to put pressure on underlying inflation, suggesting that the Federal Reserve is likely to raise interest rates again next month. However, the report also showed that rents increased at their slowest pace in nearly a year, and food prices were unchanged, indicating that inflation pressures may be starting to moderate.

The report followed comments from FRB Richmond President Barkin and FRB San Francisco’s Daly, who had contrasting views on the state of inflation. Daly saw the CPI data as good news and said that she sees “good reasons” for more tightening or a pause. On the other hand, Barkin suggested that core CPI is still far from consistent with the Fed’s 2.0% core PCE target, but noted that demand is cooling.

In addition, the monthly Treasury budget statement showed a deficit of $378.1 bn in March, which is significantly higher than the previous year’s deficit of $192.6 bn. However, borrowing from the public rose only $81.0 bn, with the rest financed by a $237.3 bn reduction in operating cash and $59.7 bn raised by other means.

Overall, while inflation pressures remain high, there are hopeful signs that they may be starting to moderate, with rents and food prices showing slower increases. The Federal Reserve is likely to raise interest rates again next month, but may pause or tighten further depending on economic conditions. The rising deficit is also a cause for concern, but may be mitigated by the reduction in operating cash and other means of financing.

It is important to continue monitoring inflation and fiscal policy, as well as the lagged effects of prior policy moves. The economy is likely to continue to recover, but the pace of growth may slow down as the effects of monetary tightening and other factors come into play.

Looking ahead, the economic recovery from the pandemic-induced recession is expected to continue, but it is likely to be uneven across sectors and geographies. The labor market is still recovering, with some industries facing labor shortages and others experiencing high levels of unemployment. The Federal Reserve will need to carefully balance its efforts to support the economy with its goal of keeping inflation under control.

It is also important to note the potential impact of fiscal policy on the economy. The Biden administration’s proposed infrastructure plan, if passed, could provide a significant boost to economic growth and job creation. However, there are concerns about how the plan will be funded and whether it will lead to higher inflation. These are complex issues that will require careful consideration by policymakers and economists alike. Overall, I believe that the US economy is on a path to recovery, but there are still risks and uncertainties that could impact the pace and sustainability of that recovery.

Conclusive Table Summary Based on April and March Events:

Economic Event

Date

Details

Implications

March Consumer Price Index report

April 12

Overall index up 0.1%, ex-food/energy index up 0.4%. “Super core” services less rent of shelter index was flat.

Mixed report, with underlying inflation pressures still present but signs of moderation in some areas. Fed likely to raise interest rates again next month.

Monthly Treasury budget statement

April 12

Deficit of $378.1 bn in March, up from $192.6 bn in previous year. Borrowing from public rose only $81.0 bn.

Sharp increase in outlays aggravating need for more financing. Timing changes affecting outlays.

FRB Richmond President Barkin comments

April 12

Core CPI still far from Fed’s 2.0% core PCE target. Monitoring bank lending and lagged effects of prior policy moves for May meeting.

Concerns about inflation and need for continued monetary tightening.

FRB San Francisco’s Daly comments

April 12

Sees good reasons for more tightening or pause. Inflation well-anchored, with core categories likely to come down soon.

Positive outlook on inflation, but still a need for caution and continued monitoring.

Non-Farm Payrolls report

April 7

916,000 jobs added in March, beating expectations. Unemployment rate drops to 6.0%.

Positive news for the labor market, indicating a stronger economic recovery. May increase pressure on Fed to raise interest rates to control potential inflation.

U.S. Trade Deficit

March

Trade deficit hits record high of $71.1 billion. Imports rose faster than exports.

Indicates strong demand for goods in the U.S. economy, but also raises concerns about potential inflation and reliance on imports. May lead to calls for trade policy changes.

ISM Manufacturing Index

April 1

Index rises to 64.7 in March, highest level since 1983. New orders and production also increase.

Indicates strong growth in the manufacturing sector, but also raises concerns about potential supply chain disruptions and inflationary pressures. May increase expectations for continued economic growth.

Consumer Confidence Index

March

Index rises to 109.7, highest level since the pandemic began. Improvement in job market and COVID-19 vaccine rollout cited as factors.

Positive sign for consumer spending and economic recovery, but also raises concerns about potential inflationary pressures and supply chain disruptions. May increase expectations for continued economic growth.

Federal Reserve Meeting

March 16-17

Fed holds interest rates steady, maintains commitment to low rates and asset purchases until substantial progress is made in economic recovery.

Indicates Fed’s continued commitment to supporting economic recovery, but also raises concerns about potential inflationary pressures and impact on financial markets. May lead to continued uncertainty about future monetary policy decisions.

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