Economic Data Tracker – 
Energy driving near-term inflation, but probably doesn’t change Fed’s rate path

Economic Data Tracker

March 15, 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 a one-week delay due to weather issues, spring break has begun to sprout. Air passenger counts jumped 6.3% to a robust 17.5 million, the highest since mid-October. Hotel occupancy rose to its highest since Thanksgiving.

Additionally, we highlight that U.S. freight trends are improving once again (slide 13). The remaining activity-based indicators (slides 5 and 6) continued to improve from the cyclically slower year-end patterns.

What’s new this week

  • Consumer inflation remains stickier than expected (slide 7).
  • Key pieces of core inflation – shelter and medical services – cooled in February (slide 8).
  • Jump in food and energy propels wholesale prices in February (slide 9).
  • Retail sales hovering just below all-time high (slide 10).
  • Monthly pace of rents cooling, but annual pace still above pre-COVID trend (slide 11).
  • Consumer confidence dipped from 2.5-year high, inflation outlook steady (slide 12).
  • U.S. freight climbed to 11-month high, just off pre-pandemic pace (slide 13)
  • Global shipping costs remain elevated following issues at two pinch points (slide 14).

Our take

The good news is that the U.S. economy continues to chug along. Yet, that resilience is seemingly bad news on the inflation front. However, we prefer a strong economy to a weaker economy. 

Two of the key inflation metrics – one for consumers and the other for wholesale prices – were hotter during February. That’s not surprising given the aforementioned economic resilience. It’s also not surprising that food and energy-related prices are climbing once again due to the rise in global shipping costs, which we have highlighted here recently.

As a refresher: the Suez Canal and the Panama Canal – the two main shipping access points globally – are both currently experiencing delays and are diverting traffic for different reasons. Accordingly, global shipping rates have soared for the past three months. That’s especially true for Europe to China routes, which typically use the Suez Canal and are now mostly being diverted around Africa.

The Suez canal’s importance is critical. About 19,000 ships and 30% of global container traffic traverse the Suez Canal every year, according to the European Union. That is roughly $1 trillion worth of goods, or 12% of global trade. It’s especially critical since the European Union’s largest trading partner is China.

More importantly, about 10% of the maritime fuel trade passes through the Red Sea. That’s essentially a double whammy for some parts of the world, including Europe – shipping delays increase the price of fuel, which in turn further increases the price of goods. Additionally, about 8% of the world’s liquefied natural gas goes through the Suez Canal.

Yet, rates have spiked even for routes that don’t pass through these two pinch points, such as the U.S. East Coast to Europe, which is still up 106% since December 3rd. Moreover, global crude oil is up nearly 10% over than span, as U.S. crude oil prices climbed to $81 per barrel this week.

In turn, higher crude oil prices pushes food prices upward (think fuel for tractors and trucking goods to markets). Thus, not surprisingly, food and energy were two of the hotter components within both of those inflation metrics. Housing was also hotter, though spot rents are cooling on a monthly basis (slide 11).

But those are "known knowns" that the Federal Reserve (Fed) is likely going to look past. At the end of the day, we don’t believe February’s hotter inflation readings will change the fact that the Fed wasn’t going to change monetary policy in March.

Furthermore, the Fed has widely preached “patience,” which appears even more appropriate now that inflation picking up. That said, taming  inflation was always going to be a bumpy path on a month-to-month basis, which necessitates a longer, more patient view on part of policy makers.

We maintain our view that the Fed will reduce rates in the summer, which would ease financing pressures on consumers and businesses alike. Yet, 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

Inflation has bumped higher, validating the Fed’s patience regarding cutting rates. The U.S. economy remains resilient, as evidenced by solid consumer spending trends along with continued hiring and business investment. These up the chances of sidestepping a recession. However, the cumulative impact of higher rates will continue to slow economic growth.