US Inflation Drop Might Have Been Transitory: New Economy Daily

Hello. Today we look at the risk of a reversal in recent progress in slowing US inflation, upcoming talks on global debt issues, and research cautioning central banks for keeping rates low for long.

One Step Back

It was nice while it lasted.

The recent improvement in US inflation likely ended in January, if economists forecasts for the consumer price index, out Tuesday morning, are accurate. The CPI is predicted to climb 0.5% from December, the most in three months, while the core rate — excluding food and energy — is seen at 0.4% for a second straight month after two readings of 0.3%.

This would cap a run of disappointing developments on the inflation front:

• biggest gain in used-car prices since late 2021
• A renewed rise in gasoline prices since the year began
• Benchmark revisions to CPI data, released Friday, that showed core inflation — which excludes food and energy — was faster than previously estimated in the closing months of 2022
• A much bigger-than-expected jump in payrolls for January that’s likely to keep pressure on wages

It all underscores that the path to price stability is set to be bumpy, as Reade Pickert reports 

“If we have a labor market that just refuses to break and if we now have inflation that’s starting to accelerate, then I think that really increases that likelihood that the Fed just keeps going,” said Aneta Markowska, chief financial economist at Jefferies LLC.

For the Federal Reserve, any disappointment would reinforce policymakers’ sense that their job is unfinished — and that financial markets were misplaced in expecting a much faster slowdown in inflation.

Even before Tuesday’s report, some Fed watchers had seen enough to raise their estimate of how high Chair Jerome Powell and his colleagues will have to take their benchmark interest rate.

On Friday, Barclays economists added a 25 basis-point hike in June to an outlook that had already penciled in quarter-point moves in March and May. That would take the peak for the Fed’s target to a range of 5.25% to 5.5%.

Also last week, Morgan Stanley’s team added a quarter-point increase for May, after having just added a March move days before. 

Bottom line is: the Fed-watching community is clearly right now over how much more work is needed to quash inflation. Tuesday’s CPI report could add some fireworks into that mix.

Chris Anstey

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The Economic Scene

India called on China to be willing to take losses on loans to struggling economies and asked the world’s biggest bilateral creditor to developing countries to avoid taking positions that would block relief for nations such as Zambia and Sri Lanka.  

“China needs to come out openly and say what their debt is and how to settle it,” said Amitabh Kant, the sherpa for India during its presidency of the Group of 20 forum of the world’s biggest economies this year. “It can’t be that the International Monetary Fund takes a haircut and it goes to settle Chinese debt. How is that possible? Everybody has to take a haircut.” 

India’s call for leniency comes ahead of its joint hosting along with the IMF and World Bank of an inaugural meeting to deal with global debt issues Friday. That gathering will bring together creditors including China with borrowing countries to try to hash out solutions for nations with unsustainable debt levels. Talks will be held a week before the meeting of G-20 nations’ fiscal and monetary leaders in Bengaluru, India.

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Today’s Must Reads

• Biden adviser | President Joe Biden has decided to name Fed Vice Chair Lael Brainard as his top economic adviser, with an announcement coming as soon as Tuesday, people familiar with the matter said.
• BOJ boss | Japan’s government nominated Kazuo Ueda to helm the central bank in a move likely to pave the way for a gradual paring back of stimulus. ’s a look at the choice of his deputies too, and this story explains why the appointments are a setback for diversity.

• | Australia’s consumer confidence tumbled on mounting cost of living pressures and expectations of further rate increases. Meanwhile speculation is mounting on possible successors to the central-bank chief.
• Crypto crackdown | Crypto’s free pass is getting yanked as powerful US financial regulators close doors to the country’s banking system.
• Pay increases | UK wages rose quicker than expected at the end of 2022, adding pressure for more rate hikes. At the same time, office workers aren’t spending on lunches like they did just after Covid restrictions ended as inflation crimps budgets.

Need-to-Know Research

At least since critics blamed a loose Fed policy stance for contributing to the unsustainable US housing boom in the mid-2000s, the idea has been out there that central banks can — contrary to their ultimate mandate — actually cause financial instability.

working paper released by the National Bureau of Economic Research concluded that, indeed, that’s a valid concern.

“We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably,” the economists from the University of Bonn and University of California, Davis, wrote. “Policymakers should take the dangers imposed by keeping policy rates low for long seriously.” 

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