Evelyn Reynolds

Inflation in the U.K. eased to 3.2% in March, the Office for National Statistics said on Wednesday, slightly higher than the 3.1% forecast from economists polled by Reuters.
The core figure, excluding energy, food, alcohol and tobacco, came in at 4.2%, compared with a projection of 4.1%.

Workers deliver drinks to a pub in the City of London, UK, on Tuesday, April 16, 2024. 
Bloomberg | Bloomberg | Getty Images

Inflation in the U.K. eased to 3.2% from 3.4% in March, the Office for National Statistics said on Wednesday, but a set of higher-than-expected figures spurred investors to push back bets on the timing of the first Bank of England rate cut.
Economists polled by Reuters had expected a reading of 3.1%.

Food prices provided the biggest downward drag on the headline rate, the ONS said, while motor fuels pushed it higher.
The core figure, excluding energy, food, alcohol and tobacco, came in at 4.2%, compared with a projection of 4.1%. Services inflation, a key watcher for U.K. monetary policymakers, declined from 6.1% to 6% — again above the expectations of both economists and the BOE.
This week, investors have been monitoring signs of a cooling U.K. labor market, with unemployment unexpectedly rising to 4.2% in the period between December and February. Wage growth excluding bonuses meanwhile dipped from 6.1% in January to 6% in February.
BOE Governor Andrew Bailey on Tuesday said he saw “strong evidence” that higher interest rates were working to tame the rate of price rises, which has cooled from a peak of 11.1% in October 2022. The central bank’s own forecast is for inflation to “briefly drop” to its 2% target in the spring before increasing slightly.

But a higher-than-expected March core print firmly above 4% is likely to increase speculation that inflation is proving stickier than recent forecasts have suggested, and the timing of the first interest rate cuts may be moving further down the line.

Market pricing shifted on Wednesday, with a majority of investors now seeing a first cut of 25 basis points in September or November from the current rate of 5.25%, with only around a 25% likelihood of a June trim.
Uncertainty has also been raised over the path of central banks around the world given signs of continued inflationary pressures in the U.S., with analysts questioning who will move ahead of the Federal Reserve.

‘The U.S. direction’

Camille de Courcel, head of European rates strategy at BNP Paribas, on Wednesday told CNBC’s “Squawk Box Europe” that the latest data showed that the U.K. was “going in the U.S. direction” and provided a risk to her prior call for a June rate cut from the BOE.
While labor data surprised to the downside, the ONS has cautioned its month-on-month figures may be skewed by methodological issues. That means the BOE’s Monetary Policy Committee will be far more focused on upside surprises on wage growth and services, de Courcel said.
Some expect a sharp fall in inflation in next month’s reading due to the year-on-year impact of utility prices.
Ruth Gregory, deputy chief U.K. economist at Capital Economics, expects the print to fall below the 2% target in April and said in a Wednesday note that the BOE may still opt for a June cut, if inflation continues to decline in the coming months. But risks of U.S.-style stickiness or inflation fueled by geopolitical tensions in the Middle East are high, she added.
The British pound moved higher against both the U.S. dollar and euro following the announcement, trading up 0.3% against the greenback at $1.246 and 0.2% stronger against the euro at 1.172.
U.K. Finance Minister Jeremy Hunt, who is gearing up for a national election this year, said on social media platform X that the inflation data was “welcome news.” More

The International Monetary Fund on Tuesday raised its global growth forecast slightly, saying the economy had proved “surprisingly resilient.”
The IMF now expects global growth of 3.2% in 2024, up by a modest 0.1 percentage point from its earlier January forecast.
The IMF’s chief economist, Pierre-Olivier Gourinchas, said the findings suggest the global economy is heading for a soft landing, though several downside risks remain.

Crowds walk below neon signs on Nanjing Road. The street is the main shopping district of the city and one of the world’s busiest shopping districts.
Nikada | E+ | Getty Images

The International Monetary Fund on Tuesday slightly raised its global growth forecast, saying the economy had proven “surprisingly resilient” despite inflationary pressures and monetary policy shifts.
The IMF now expects global growth of 3.2% in 2024, up by a modest 0.1 percentage point from its earlier January forecast, and in line with the growth projection for 2023. Growth is then expected to expand at the same pace of 3.2% in 2025.

The IMF’s chief economist, Pierre-Olivier Gourinchas, said the findings suggest the global economy is heading for a “soft landing,” following a string of economic crises, and that the risks to the outlook were now broadly balanced.
“Despite gloomy predictions, the global economy remains remarkably resilient, with steady growth and inflation slowing almost as quickly as it rose,” he said in a blog post.
Growth is set to be led by advanced economies, with the U.S. already exceeding its pre-Covid-19 pandemic trend and with the euro zone showing strong signs of recovery. But dimmer prospects in China and other large emerging market economies could weigh on global trade partners, the report said.

China among key downside risks

China, whose economy remains weakened by a downturn in its property market, was cited among a series of potential downside risks facing the global economy. Also included were price spikes prompted by geopolitical concerns, trade tensions, a divergence in disinflation paths among major economies and prolonged high interest rates.
To the upside, looser fiscal policy, falling inflation and advancements in artificial intelligence were cited as potential growth drivers.

Central banks are now being closely watched for a signal on the future path of inflation, with opinion diverging on either side of the Atlantic as to when the Federal Reserve and the European Central Bank will cut rates. Some analysts have recently forecast a possible Fed rate hike as stubborn inflation and rising Middle East tensions weigh on economic sentiment.
The IMF said it sees global headline inflation falling from an annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies.
“As the global economy approaches a soft landing, the near-term priority for central banks is to ensure that inflation touches down smoothly, by neither easing policies prematurely nor delaying too long and causing target undershoots,” Gourinchas said.
“At the same time, as central banks take a less restrictive stance, a renewed focus on implementing medium-term fiscal consolidation to rebuild room for budgetary maneuver and priority investments, and to ensure debt sustainability, is in order,” he added.
Despite the rosier outlook of Tuesday, global growth remains low by historic standards, owing in part to weak productivity growth and increasing geopolitical fragmentation. The IMF’s five-year forecast sees global growth at 3.1%, its lowest level in decades. More

The U.S. economy could be headed for stormy waters in 2025 if the Federal Reserve does not take action soon on interest rates, State Street’s head of investment strategy in EMEA said Tuesday.
Altaf Kassam told CNBC that classic monetary policy mechanisms had “broken,” meaning that any changes made by the Fed will now take longer to trickle down into the real economy.
“The problem is, if rates stay at this level until say 2025, when a big wall of financing is due, then I think we will start to see more things break,” Kassam said.

Federal Reserve Bank Chair Jerome Powell speaks during a news conference at the bank’s William McChesney Martin building on March 20, 2024 in Washington, DC. 
Chip Somodevilla | Getty Images

The U.S. economy could be headed for stormy waters in 2025 if the Federal Reserve does not take action soon on interest rates, State Street’s head of investment strategy in EMEA said Tuesday.
Altaf Kassam told CNBC that classic monetary policy mechanisms had “broken,” meaning that any changes made by the Fed will now take longer to trickle down into the real economy — potentially delaying any major shocks.

“The traditional transmission policy mechanism has broken, or doesn’t work as well,” Kassam told “Squawk Box Europe.”
The research chief attributed that shift to two things. Firstly, U.S. consumers, whose largest liability is typically their mortgage, which were mostly secured on a longer-term, fixed rate basis during the Covid-19 low-interest rate era. Similarly, U.S. companies largely refinanced their debts at lower rates at the same time.
As such, the impact of, for example, sustained higher interest rates may not be felt until further down the line when they come to refinance.
“The problem is, if rates stay at this level until say 2025, when a big wall of refinancing is due, then I think we will start to see more things break,” Kassam said.
“For now, consumers and corporates aren’t feeling the pinch of higher interest rates,” he added.

Expectations of a near-term Fed rate cuts have faded lately amid persistent inflation data and hawkish commentary from policymakers.
San Francisco Fed President Mary Daly said Monday there was “no urgency” to cut U.S. interest rates, with the economy and labor market continuing to show signs of strength, and inflation still above the Fed’s target of 2%.
Until as recently as last month, markets had been anticipating up to three rate cuts this year, with the first in June. However, a string of banks have since pushed back their timelines, with Bank of America and Deutsche Bank both saying last week that they now expect just one rate cut in December.
That marks a deviation from the European Central Bank, which is still broadly expected to lower rates in June after holding steady at its meeting last week. However, Morgan Stanley on Monday trimmed its 2024 rate cut expectations for the ECB from 100 basis points to 75 basis points, which it said was due to “the change in the forecast of the Fed cutting cycle.”
Kassam said Tuesday that State Street’s expectations of a June Fed rate cut had not changed. More

Rising inflation in March didn’t deter consumers, who continued shopping at a more rapid pace than anticipated, the Commerce Department reported Monday.
Retail sales increased 0.7% for the month, considerably faster than the Dow Jones consensus forecast for a 0.3% rise, according to Census Bureau data that is adjusted for seasonality but not for inflation.

The consumer price index increased 0.4% in March, the Labor Department reported last week in data that also was higher than the Wall Street outlook. That means consumers more than kept up with the pace of inflation, which ran at a 3.5% annual rate for the month, below the 4% retail sales increase.
Excluding auto-related receipts, retail sales jumped 1.1%, also well ahead of the estimate for a 0.5% advance.
A rise in gas prices helped push the headline retail sales number higher, with sales up 2.1% on the month at service stations. However, the biggest growth area for the month was online sales, up 2.7%, while miscellaneous retailers saw an increase of 2.1%.
Multiple categories did report declines in sales for the month: Sporting goods, hobbies, musical instruments and books posted a 1.8% decrease, while clothing stores were off 1.6%, and electronics and appliances saw a 1.2% drop.
Stock market futures added to gains following the report, while Treasury yields also pushed sharply higher. The upbeat outlook for the Wall Street open came despite an escalation over the weekend in Middle East tensions as Iran launched aerial strikes at Israel.

Resilient consumer spending has helped keep the economy afloat despite higher interest rates and concerns over stubborn inflation. Consumer spending accounts for nearly 70% of U.S. economic output so it is critical to continued growth in gross domestic product.
Monday’s data comes with market concerns elevated over the path of monetary policy. Federal Reserve officials have expressed caution about cutting interest rates while inflation pressures continue, and investors have been forced to reduce their expectation for easing in policy this year.
Stronger consumer spending could cause the Fed to hold off longer on cuts, said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
“Alongside the recent resurgence in employment growth, the continued resilience of consumption is another reason to suspect the Fed will wait longer before starting to cut interest rates, which now we think won’t happen until September,” Hunter said in a note after the retail sales release.
Market pricing, which has been highly volatile over the past several weeks, also is pointing to the first cut coming in September, according to the CME Group’s FedWatch gauge of futures prices.
In other economic news Monday, the Empire State Manufacturing index, which gauges activity in the New York region, increased in April from a month ago but remained in contraction territory. The index hit -14.3, better than the -20.9 reading for March but below the Dow Jones estimate for -10.
The index measures the percentage of firms reporting expansion against contraction, so anything below zero represents contraction. Shipments and delivery time readings saw a decline, while prices paid increased.

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Investors, consumers, policymakers and economists have been caught off guard with just how stubborn price pressures have been to start 2024.
Heading into the year markets saw an accommodative Fed poised to cut interest rates early and often. That has changed dramatically.
This week was filled with bad economic news, with each day literally bringing another dose of reality about inflation.
Fed officials took notice of the higher readings, but did not sound panic alarms, as most said they still expect to cut later this year.

A sign advertising units for rent is displayed outside of a Manhattan building on April 11, 2024 in New York City.
Spencer Platt | Getty Images

The early data is in for the path of inflation during the first three months of 2024, and the news so far is, well, not good.
Pick your poison. Whether it’s prices at the register or wholesale input costs, while inflation is off the blistering pace of 2022, it doesn’t appear to be going away anytime soon. Future expectations also have been drifting higher.

Investors, consumers and policymakers — even economists — have been caught off guard with just how stubborn price pressures have been to start 2024. Stocks slumped Friday as the Dow Jones Industrial Average coughed up nearly 500 points, dropping 2.4% on the week and surrendering nearly all its gains for the year.
“Fool me once, shame on you. Fool me twice, shame on me,” Harvard economist Jason Furman told CNBC this week. “We’ve now had three months in a row of prints coming in above just about what everyone expected. It’s time to change the way we think about things going forward.”
No doubt, the market has been forced to change its thinking dramatically.

Even import prices, an otherwise minor data point, contributed to the narrative. In March, it posted its biggest increase for a three-month period in about two years. All of it has amounted to a big headache for markets, which sold off through most of the week before really hitting the skids Friday.
As if all the bad inflation news wasn’t enough, a Wall Street Journal report Friday indicated that Iran plans to attack Israel in the next two days, adding to the cacophony. Energy prices, which have been a major factor in the past two months’ inflation readings, pushed higher on signs of further geopolitical turmoil.

“You can take your pick. There’s a lot of catalysts” for Friday’s sell-off, said market veteran Jim Paulsen, a former strategist and economist with Wells Fargo and other firms who now writes a blog for Substack titled Paulsen Perspectives. “More than anything, this is really down to one thing now, and it’s the Israel-Iran war if that’s going to happen. … It just gives you a great sense of instability.”

High hopes dashed

In contrast, heading into the year markets saw an accommodative Fed poised to cut interest rates early and often — six or seven times, with the kickoff happening in March. But with each months’ stubborn data, investors have had to recalibrate, now anticipating just two cuts, according to futures market pricing that sees a non-zero probability (about 9%) of no reductions this year.
“I’d love the Fed to be in a position to cut rates later this year,” said Furman, who served as chair of the Council of Economic Advisers under former President Barack Obama. “But the data is just not close to being there, at least yet.”
This week was filled with bad economic news, with each day literally bringing another dose of reality about inflation.
It started Monday with a New York Fed consumer survey showing expectations for rent increases over the next year rising dramatically, to 8.7%, or 2.6 percentage points higher than the February survey. The outlook for food, gas, medical care and education costs all rose as well.
On Tuesday, the National Federation of Independent Business showed that optimism among its members hit an 11-year low, with members citing inflation as their primary concern.
Wednesday brought a higher-than-expected consumer price reading that showed the 12-month inflation rate at 3.5%, while the Labor Department on Thursday reported that wholesale prices showed their biggest one-year gain since April 2023.

Finally, a report Friday indicated that import prices rose more than expected in March and notched the biggest three-month advance since May 2022. On top of that, JPMorgan Chase CEO Jamie Dimon warned that “persistent inflationary pressures” posed a threat to the economy and business. And the University of Michigan’s closely watched consumer sentiment survey came in lower than expected, with respondents pushing up their inflation outlook as well.

Still ready to cut, sometime

Fed officials took notice of the higher readings but did not sound panic alarms, as most said they still expect to cut later this year.
“The economy has come a long way toward achieving better balance and reaching our 2 percent inflation goal,” New York Fed President John Williams said. “But we have not seen the total alignment of our dual mandate quite yet.”
Boston Fed President Susan Collins said she sees inflation “durably, if unevenly” drifting back to 2% as well, but noted that “it may take more time than I had previously thought” for that to happen. Minutes released Wednesday from the March Fed meeting showed officials were concerned about higher inflation and looking for more convincing evidence it is on a steady path lower.

While consumer and producer price indexes captured the market’s attention this week, it’s worth remembering that the Fed’s attention is elsewhere when it comes to inflation. Policymakers instead follow the personal consumption expenditures price index, which has not been released yet for March.
There are two key differences between the CPI and the PCE indexes. Primarily, the Commerce Department’s PCE adjusts for changes in consumer behavior, so if people are substituting, say, chicken for beef because of price changes, that would be reflected more in PCE than CPI. Also, PCE places less weighting on housing costs, an important consideration with rental and other shelter prices holding higher.
In February, the PCE readings were 2.5% for all items and 2.8% ex-food and energy, or the “core” reading that Fed officials watch more closely. The next release won’t come until April 26; Citigroup economists said that current tracking data points to core edging lower to 2.7%, better but still a distance from the Fed’s goal.

Adding up the signals

Moreover, there are multiple other signals showing that the Fed has a long way to go.
So-called sticky price CPI, as calculated by the Atlanta Fed, edged up to 4.5% on a 12-month basis in March, while flexible CPI surged a full percentage point, albeit to only 0.8%. Sticky price CPI entails items such as housing, motor vehicle insurance and medical care services, while flexible price is concentrated in food, energy and vehicle prices.
Finally, the Dallas Fed trimmed mean PCE, which throws out extreme readings on either side, to 3.1% in February — again a ways from the central bank’s goal.
A bright spot for the Fed is that the economy has been able to tolerate high rates, with little impact to the employment picture or growth at the macro level. However, there’s worry that such conditions won’t last forever, and there have been signs of cracks in the labor market.
“I have long worried that the last mile of inflation would be the hardest. There’s a lot of evidence for a non-linearity in the disinflation process,” said Furman, the Harvard economist. “If that’s the case, you would require a decent amount of unemployment to get inflation all the way to 2.0%.”
That’s why Furman and others have pushed for the Fed to rethink it’s determined commitment to 2% inflation. BlackRock CEO Larry Fink, for instance, told CNBC on Friday that if the Fed could get inflation to around 2.8%-3%, it should “call it a day and a win.”
“At a minimum, I think getting to something that rounds to 2% inflation would be just fine — 2.49 rounds to two. If it stabilized there, I don’t think anyone would notice it,” Furman said. “I don’t think they can tolerate a risk of inflation above 3 though, and that’s the risk that we’re facing right now.”

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