Economic Data Tracker – 
All inflation, all the time – but don’t panic 

Economic Data Tracker

April 12, 2024

Our weekly view on the economy including rationale on GDP, jobs report, and Fed policy decisions. Download the entire weekly edition to view timely charts and data providing a comprehensive picture of how incoming economic data affects our economic outlook.

Trend watch

Following last week’s weather weirdness, spring travel is back to the typical seasonal pattern. The weekly air passenger counts fell 0.6% from the prior week, which is the norm in the week after Easter. Yet, at 17.3 million, it’s certainly not weak. To put that in context, the U.S. didn’t surpass 17 million passengers per week until late May in 2019 or 2023. Year to date it’s running 7.7% ahead of the same period in 2019.

The trends for most of the other activity-based indicators recovered following softness around the Easter holiday (slides 5 and 6). 

What’s new this week

  • Consumer inflation remains stickier than expected (slide 7).
  • Key pieces of core inflation – shelter & medical services – aren’t cooling enough (slide 8).
  • Wholesale prices cool in March as food and energy moderate (slide 9).
  • Consumer confidence down from 2.5-year high, inflation outlook ticked up (slide 10).
  • U.S. gasoline surges to highest level since October on Middle East tensions (slide 11). 
  • Monthly and annual pace of rents slip below pre-COVID trend (slide 12). 

Our take

It was seemingly “all inflation, all the time” this week as most of the March inflation data was released. The good news is that the U.S. economy remains solid. The bad news is that strength is keeping inflation stickier than expected.

The big surprise was the Consumer Price Index (CPI), which was released on Wednesday. It came in hotter than expected for the second straight month (for March and February). Energy was among the biggest drivers, as gasoline prices rose 1.7% in March (see slide 11). Moreover, core CPI, which excludes the volatile food & energy components, also surprised to the upside – up 0.4% for the third month in a row. Shelter and medical services (see slide 8) were the culprits.

Hotter CPI for multiple months, coupled with last week’s stronger-than-expected jobs report and the recent surge in crude oil prices, have some investors worried that the Federal Reserve (Fed) won’t be able cut interest rates nearly as soon as they’d expected – sending stocks and bonds sharply lower on Wednesday (yields rose).

On Thursday, the wholesale inflation gauge, known as the Producer Price Index (PPI), offered some solace, coming in cooler than expected. However, the aforementioned surge in crude oil prices, which topped $86/barrel in the U.S. this week, contributed to a downtick in consumer confidence and uptick in consumer inflation expectations.

While we are disappointed that inflation readings were hotter, we view the ensuing scramble to push out Fed rate cuts to late this year – along with the panic by some that “the Fed can’t cut rates this year” – as overdone.

It’s important to understand several key points:

  • Fed funds futures don’t have a good track record of predicting what will happen. While they’re a useful yardstick to estimate where investor sentiment is at a point in time, futures markets aren’t very accurate going out more than about 60 to 90 days.
  • The third key inflation metric is likely to be cooler than CPI. Based on the data already received, core personal consumption expenditures (PCE) – which also excludes food & energy – should cool to about 0.25% when it's released in two weeks. By the way, that is the Fed’s preferred inflation gauge. 
  • The biggest problem child – rents – is behaving. As we show on slide 12, rents (aka asking rents) are cooling on a monthly basis and are below the pre-COVID trend. More importantly, March was the fifth month in a row that asking rents have been below the pre-pandemic trend. Several other rent price indices show the same thing. Given how the Bureau of Labor Statistics calculates shelter, which attempts to capture what existing renters pay each month rather than new asking rents, there is a 12-month lag for the CPI’s shelter component. The Fed knows this dynamic.
  • The Fed has time on their side. We agree that the hotter recent data complicates the Fed’s job, especially for the possibility of a rate cut at the June meeting. Yet, the muddled view of inflation also validates their recent mantra of patience. There’s no imminent danger to waiting a little longer. 
  • Though solid, the economy is gradually cooling. The economy has markedly cooled compared to the second half of 2023. Last week we noted the gradual cooling in the labor market compared to last year. Furthermore, the reasons for slower growth remain in place – elevated borrowing costs and slower activity (lower unit growth) – still pose risks to the economy. That said, we aren’t overly concerned that the economy “must have” rate cuts to continue to avoid a recession.

We maintain our view that the Fed will reduce rates in the summer, which would ease financing pressures on consumers and businesses alike. More specifically, we see very little practical difference between cutting in July versus June. Either way, simply reducing interest rates slightly wouldn’t be accommodative monetary policy. In other words, lowering the Fed funds target rate to say 5% would still be restrictive. That is much of the reason why the Fed doesn’t have to wait until inflation moves all the way down to its 2% target, along with considerable lags between when the Fed raises/lowers interest rates and when it fully impacts the economy. 

Bottom line

The U.S. economy remains resilient and should sidestep a recession. Most economic data continues to steadily improve. Yet, the cumulative impact of higher rates does weigh on economic growth. We maintain our view that the Fed will reduce rates in the summer.