Inflation resists easing
The persistent strength of the US economy is leading traders and the Federal Reserve to revise their expectations for interest rate cuts this year, allowing the Fed to maintain restrictive policies due to stubborn inflation, according to Kiwibank.
US Consumer strength boosts economy
Recent data from the US showed continued economic resilience, highlighted by stronger-than-expected retail sales in March.
“Sales jumped 0.7% over the month, up from the previous print of 0.6%, and against expectations of a slowdown,” said Kiwibank’s Jarrod Kerr, Mary Jo Vergara, and Sabrina Delgado (pictured above, left to right).
This robust consumer spending has helped sustain the US economy’s growth, with an anticipated expansion of 2.5% in the preliminary GDP print.
Central banks remain cautious on rate cuts
Despite the strong economic indicators, central banks, including the Federal Reserve, are cautious about reducing interest rates too soon.
Fed Chair Jerome Powell and other officials have indicated a reluctance to cut rates, with September now appearing more likely for any potential rate reductions.
“At the end of the day, central banks are inflation fighters,” Kerr, Vergara, and Delgada said, emphasising the Fed’s strategy to maintain restrictive policies until inflation stabilises at around 2%.
Domestic inflation remains stubborn
The battle against inflation is not just a US issue but also a significant concern domestically.
Recent data showed a moderate easing of the annual inflation rate to 4% from 4.7%, driven by reductions in imported inflation. However, persistent domestic price pressures, particularly in rents and insurance premiums, complicate efforts to achieve stable inflation.
“Domestic inflation is barely budging with just a move from 5.9% yoy to 5.8% yoy," the economists said, underscoring the challenges of curbing inflation to the target 2%.
Outlook and implications for monetary policy
The ongoing strength of the economy and the stubbornness of domestic inflation suggested that central banks might delay interest rate cuts.
The Kiwibank economists maintained their forecast for rate cuts to begin in November, though they acknowledge growing risks of further delays.
“We always knew that getting to 4% would be the easy part,” they said. “The tricky part is getting to 2%. And the stubbornness in domestic price pressures risks extending the journey to stable inflation.”
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