Evelyn Reynolds

European Central Bank Chief Economist Philip Lane told CNBC that while March data showed progress on inflation, it was important to take time to decide when to ease monetary policy.
“We need to see workers’ real incomes improve, to rebuild, not just this year, the year after … But we also need to see, essentially, firms absorbing a fair amount of that in lower profits,” Lane also said.

The European Central Bank must take its time to get interest rate cuts right and will have a clearer picture of inflationary pressures in June, the institution’s chief economist told CNBC.
“A lot of evidence is accumulating, but what’s also fair to say is that the transition from this holding phase, we’ve been on hold since last September since a substantial hiking cycle, we do have to take our time to get that right, from holding to dialing back restrictions,” Philip Lane told CNBC’s Steve Sedgwick on Thursday.

Lane, a Governing Council member, said the euro zone central bank’s March meeting had been an “important milestone” in the accumulation of evidence, and showed the “disinflation process has been ongoing.” During the meeting, the ECB held rates and released updated macroeconomic projections, which lowered its inflation forecast for this year to 2.3% from 2.7%.
Inflation in the 20-nation bloc eased to 2.6% in February.
In line with the ECB’s March messaging, Lane said that more data was required, particularly around wages, and that the Governing Council would “learn a lot by April, a lot more by June” — the dates of its next two meetings.
In a press conference following the March meeting, ECB President Christine Lagarde said market pricing on the timing of rate cuts — which indicate a start in June as of Thursday — “seems to be converging better” with the central bank’s view.

June emerged as a key date in market commentary, as it’s set to mark the first meeting where the ECB can assess spring data on wage negotiations for the year.

Asked about other colleagues on the ECB’s Governing Council who have suggested rate cuts could take place before the summer, Lane said he believed this was a reference to the second quarter, which would include June.
“I think Q2 is a time when we will be far enough into 2024 to see more of the wage dynamic, to see more of the price pressures.”
He stressed that it was important, in his own role, to “avoid trying to provide calendar guidance to the market.”
“Once we are sufficiently confident that we will get back to target in a sustainable manner, in a timely manner, that’s the right time to move to the next phase,” he said.

Room for profits to come down

Policymakers have repeatedly stressed that many of the causes of the inflationary cycle have subsided, such as the energy price spike and supply chain issues. But they remain concerned about domestic inflationary pressures from corporate profits and wage rises.
Bank of England Governor Andrew Bailey caused controversy in 2022 for suggesting workers should not ask for a pay rise in order to avoid stoking inflation.
Lane said Thursday that, while the ECB’s forecast relied on some moderation in wage growth, it was “important” for people’s inflation-adjusted salaries to improve, and that companies should shoulder lower profits to allow this to happen.
“Wages were not the source of this inflation problem. But in terms of making sure we get back to target, the interplay between wages and profits, our forecast is built on a degree of wage deceleration,” he said.
“It’s important to say, we need to see workers’ real incomes improve, to rebuild, not just this year, [but] the year after. So we allow for higher to normal wage increases.”
Lane added, “But we also need to see, essentially, firms absorbing a fair amount of that in lower profits. Profits were quite high in 2022, there is some room for profits to come down. And that is part of the open questions we have.” More

The headline figure was in line with the forecast from economists polled by Reuters.
It follows a 0.1% contraction in December, while the U.K. economy entered a shallow recession in the second half of last year.

LONDON — U.K. gross domestic product grew 0.2% in January, the Office for National Statistics said Wednesday, as construction output jumped more than expected.
The headline figure was in line with the forecast from economists polled by Reuters.

It follows a 0.1% contraction in December, while the U.K. economy entered a shallow recession in the second half of last year.
Construction output rebounded from contraction to grow 1.1% in January, the ONS said, but fell 0.9% over a three-month period. The U.K.’s dominant services sector recorded a 0.2% rise in January, providing the biggest contribution to growth, as production output fell 0.2%.
Despite recording monthly growth, GDP was estimated to have shrunk 0.3% compared with a year ago in January, and fallen 0.1% over the three months to January 2024.

Jack Meaning, chief U.K. economist at Barclays, described the figures as “not a hugely positive picture, but it’s ahead of where we were at the end of last year.”
“Industrial and manufacturing have been weak for the last few prints, you’d expect some bounce-back from that in the end,” Meaning told CNBC’s “Squawk Box Europe” Wednesday.

“This is good to see, but we’ll have to see it on a more prolonged basis to know that it is something sustained.”
The latest figures are consistent with a forecast for a “gradual recovery in activity” in the coming months, said James Smith, developed markets economist at ING.
“We think the decline in overall fourth quarter GDP, which marked the second consecutive quarter of negative growth and therefore a technical recession, is unlikely to be repeated in the first quarter of 2024,” Smith said in a note.
The British pound was slightly lower against the U.S. dollar and the euro following the release. More

The consumer price index, a broad measure of goods and services costs, increased 0.4% for the month and 3.2% from a year ago. The monthly measure was in line with expectations while the 12-month reading was slightly higher.
The core CPI rose 0.4% on the month and was up 3.8% on the year. Both were one-tenth of a percentage point higher than forecast.
A 2.3% increase in energy costs helped boost the headline inflation number. Food costs were flat on the month, while shelter climbed another 0.4%.

Fresh chicken breasts are displayed for sale in the meat area of a Sprouts Farmers Market grocery store in Redondo Beach, California on February 23, 2024. 
Patrick T. Fallon | AFP | Getty Images

Inflation rose again in February, keeping the Federal Reserve on course to wait at least until the summer before starting to lower interest rates.
The consumer price index, a broad measure of goods and services costs, increased 0.4% for the month and 3.2% from a year ago, the Labor Department’s Bureau of Labor Statistics reported Tuesday. The monthly gain was in line with expectations, but the annual rate was slightly ahead of the 3.1% forecast from the Dow Jones consensus.

Excluding volatile food and energy prices, the core CPI rose 0.4% on the month and was up 3.8% on the year. Both were one-tenth of a percentage point higher than forecast.

While the 12-month pace is off the inflation peak in mid-2022, it remains well above the Fed’s 2% goal as the central bank approaches its two-day policy meeting in a week.
A 2.3% increase in energy costs helped boost the headline inflation number. Food costs were flat on the month, while shelter rose another 0.4%.
The BLS reported that the increases in energy and shelter amounted to more than 60% of the total gain. Gasoline jumped 3.8% on the month while owners’ equivalent rent, a hypothetical gauge of what homeowners could get renting their properties, rose 0.4%.
“Inflation continues to churn above 3%, and once again shelter costs were the main villain. With home prices expected to rise this year and rents falling only slowly, the long-awaited fall in shelter prices isn’t coming to the rescue any time soon,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Reports like January’s and February’s aren’t going to prompt the Fed to lower rates quickly.”

Airline fares posted a 3.6% increase, apparel prices rose 0.6% and used vehicles were up 0.5%. Medical care services, which helped feed a higher-than-expected CPI increase in January, decreased 0.1% last month.
The year-over-year increase for headline CPI was 0.1 percentage point higher than January, while core was one-tenth of a point lower.

Markets showed little initial reaction after the news broke, with futures tied to major stock averages as well as Treasury yields slightly higher.
While the 12-month pace is off the inflation peak in mid-2022, it remains well above the Fed’s 2% goal as the central bank approaches its two-day policy meeting in a week.
Fed officials in recent weeks both have signaled that rate cuts are likely at some point this year and expressed caution about letting up too soon in the battle against high prices. The statement after the January meeting indicated that policymakers need “greater confidence” that inflation is moving back to target.
Chair Jerome Powell, in congressional testimony last week, echoed those concerns, though he did mention that the Fed is probably “not far” from the point where it can start easing up on monetary policy.
Tuesday’s report “leaves Fed officials some way from attaining the ‘greater confidence’ needed to begin cutting interest rates,” said Paul Ashworth, chief North America economist at Capital Economics.
For financial markets, the shift in the Fed stance from its apparent policy pivot in late 2023 has meant a repricing on the pace of rate cuts. Where futures traders entered the year expecting cuts to start coming in March, with six or seven total on the year, they have pushed out the first reduction to June, with three to follow, assuming cuts in quarter percentage point increments.
A bustling economy has helped the Fed focus on incoming data and allowed policymakers to avoid having to rush to lower rates. Gross domestic product expanded at a 2.5% annualized pace in 2023 and is on pace to increase at a 2.5% pace in the first quarter of 2024, according to the Atlanta Fed’s GDPNow tracker.
One key ingredient in that growth has been a resilient consumer boosted by a strong labor market. The economy added another 275,000 nonfarm jobs in February, though the increase skewed heavily to part-time jobs and the unemployment rate rose to 3.9%.
Such strength can be a double-edged sword: While the growth in the face of aggressive rate hikes has bought the Fed time on policy, it also raises concerns that inflation could be more durable than expected.
Housing costs in particular have caused concern.
Shelter comprises about one-third of the CPI weighting and has been slow to decelerate, at least according to the BLS measure. Fed officials see rental prices coming down through the year, and other measures outside the CPI computation of owners-equivalent rent have shown easing price pressures.

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The CNBC/NRF Retail Monitor rose 1.06% in February, when excluding autos and gas, and increased 0.95% when taking out restaurants as well, the Retail Monitor’s core measure.
Removing the effect of the Leap Day, sales rose 0.4%, or less than half of the unadjusted gain, but they were still up from the 0.2% decline in January.
The Retail Monitor uses actual, anonymized credit and debit card purchase data compiled by Affinity Solutions.

People shop at the Macy’s store on Herald Square on January 19, 2024 in New York City. 
Michael M. Santiago | Getty Images News | Getty Images

Consumer spending bounced back in February from a January dip, with a little help from Leap Day. But sales still registered good gains even after correcting for that extra spending day.
The CNBC/NRF Retail Monitor, derived from actual credit card spending data from Affinity Solutions, rose 1.06% in February, when excluding autos and gas. It increased 0.95% when taking out restaurants as well, the Retail Monitor’s core measure.

Removing the effect of the Leap Day, sales rose 0.4%, or less than half of the unadjusted gain, but they were still up from the 0.2% decline in January. Taking out restaurants, the Retail Monitor adjusted for the Leap Day was up 0.3%, compared with a 0.04% gain in January.
“While the future direction of interest rates and inflation remains uncertain, it’s clear that a strong job market and increases in real wages are continuing to support spending,” said Matt Shay, the president of the National Retail Federation.
Looking at individual sectors, not adjusted of the Leap Day:

Online and other non-store sales were up 0.8% month over month seasonally adjusted and up 18.08% year over year.
Sporting goods, hobby, music and bookstores were up 2.29% month over month seasonally adjusted and up 13.67% year over year.
Health and personal care stores were up 0.96% month over month seasonally adjusted and up 11.18% year over year.
Clothing and accessories stores were up 0.51% month over month and up 8.05% year over year unadjusted.

The sector data was also impacted by the Leap Day and the index overall could differ more sharply this month from the Census retail data than it normally does.

Unlike survey-based numbers collected by the Census Bureau, the Retail Monitor uses actual, anonymized credit and debit card purchase data compiled by Affinity and is not revised monthly or annually.
Economists are looking for a 0.8% gain in the Census retail report on Thursday, a complete reversal of the 0.8% decline in January. So both that forecast, if accurate, and the CNBC/NRF Monitor for February, suggest January was the not the beginning of the long-awaited consumer spending slowdown. More

The Labor Department’s Bureau of Labor Statistics releases its latest reading on the consumer price index on Tuesday at 8:30 a.m. ET.
Excluding food and energy, the increase for core inflation is forecast at a 0.3% gain, also one-tenth of a percentage point above the previous month.
Inflation’s resilience almost certainly will assure no Fed rate cuts at its meeting on April 30 to May 1, and possibly into the summer.

Shoppers are seen in a Kroger supermarket in Atlanta on Oct. 14, 2022.
Elijah Nouvelage | AFP | Getty Images

Rising gasoline prices likely put a floor under inflation in February, potentially reinforcing the Federal Reserve’s decision to take a go-slow approach with interest rate reductions.
Economists expect that prices across a broad spectrum of goods and services rose 0.4% on the month, just ahead of the January pace for 0.3%, according to the Dow Jones consensus. Excluding food and energy, the increase for core inflation is forecast at a 0.3% gain, also one-tenth of a percentage point above the previous month.

On a year-over-year basis, headline inflation is expected to show a 3.1% gain and core inflation a 3.7% increase when the Labor Department’s Bureau of Labor Statistics releases its latest reading on the consumer price index Tuesday at 8:30 a.m. ET. The respective 12-month readings in January were 3.1% and 3.9%.
Though it has fallen sharply since its peak in mid-2022, inflation’s resilience almost certainly will assure no Fed rate cuts at its next meeting March 19-20, and possibly into the summer, according to current market pricing. Markets were rattled in January when the CPI data came in higher than expected, and Fed officials shifted their rhetoric afterward to a more cautious tone about easing policy.

“While we do not expect the trend in inflation to re-accelerate this year, less clear progress over the next few months is likely to keep the Fed searching for more confidence that inflation is on course to return to target on a sustained basis,” Sarah House, senior economist at Wells Fargo, said in a recent client note.
Energy prices had eased earlier in the winter, putting some downward pressure on headline readings.
But Wells Fargo estimates that energy services rebounded 4% in February, leading to an increase at the pump, where a gallon of regular gas is up about 20 cents, or more than 6%, from a month ago, according to AAA.

The bank also estimates that goods prices have held their ground despite an easing in supply chain pressures and pressure from higher interest rates. On the brighter side, the House said lower prices on travel, medical care and other services helped keep inflation in check.
Still, Wells Fargo has raised its full-year inflation forecast.
The bank’s economists now expect core CPI to run at a 3.3% rate this year, up from the previous 2.8% estimate. Focusing on the core personal consumption expenditures price index, the preferred Fed gauge, Wells Fargo sees inflation at 2.5% for the year, versus a prior estimate of 2.2%.

Wells Fargo isn’t alone in expecting a higher pace of inflation.
In its February survey of consumers, the New York Fed found that while respondents held to their one-year outlook for inflation at 3%, their expectations at the three- and five-year horizons accelerated to 2.7% and 2.9% respectively, both well ahead of the central bank’s 2% target.
While increases in gas prices can play an outsize role in monthly fluctuations for the survey, the outlook for gas price increases was actually relatively benign.

An Atlanta Fed measure of “sticky price” inflation held at 4.6% on a 12-month basis in January. The gauge is weighted toward items such as housing and insurance, and Fed officials are hoping that shelter costs decrease through the year, taking some pressure off the cost of living gauges.
On Thursday, the BLS will release the February producer price index, which measures what producers get for their goods and services at the wholesale level. The two indexes will be the last inflation data the rate-setting Federal Open Market Committee will see before it meets next week.

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