With inflation back up, the long-predicted storm clouds in the economy may actually be forming

new York
CNN
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Progress on inflation is going in the wrong direction.

The latest consumer price index, released on Wednesday, showed annual inflation rose to 3.5% in March, up from 3.2% in February. This is the largest annual gain in six months.

Even though the current inflation rate is better than last March’s 4.9% rate, it means the rate cuts investors have been waiting for may not happen this year. Now, they may need to prepare for another rate hike, with interest rates at their highest level in 23 years.

This could mean that the many influential leaders and economists who have long predicted that storm clouds and a hurricane would hit the U.S. economy may finally be right.

Chief among them is Jamie Dimon, CEO of JPMorgan Chase, whose annual letter to shareholders this week highlighted “persistent inflationary pressures.” He also expressed skepticism about the possibility of a soft landing for the economy, where inflation continues to cool without causing unemployment to rise.

Federal Reserve officials share Dimon’s concerns, leading some to question whether rate cuts should occur this year, contrasting sharply with the median forecast of three cuts they made at this month’s meeting last and first reported in December. But potentially persistent inflation isn’t the only warning sign for the economy right now.

Fed Governor Michelle Bowman said last week that she was even willing to consider raising rates “if inflation stagnates or even reverses.” For now, she doesn’t think there’s a strong likelihood that increases will be warranted.

Inflation measured by the Fed’s preferred gauge, the Personal Consumption Expenditures Price Index, is a full percentage point lower than the CPI. But this has also accelerated in the latest report.

Significant progress in reducing inflation from last year’s multi-decade high in 2022 is due to improved supply chains, a higher supply of workers due in part to immigration and lower energy prices, Bowman said in a speech last week.

“It is unclear whether further improvements on the supply side will continue to lower inflation,” Bowman added. At the same time, like Dimon, she worries that geopolitical conflicts and fiscal spending will put more pressure on prices.

“In short, the report is discouraging for the Fed and for the prospects of a rate cut in June,” Bank of America economists said in a note released after Wednesday’s CPI report. “Inflation is proving sticky. »

They still think a June spending cut will happen, but have “low confidence.” Investors, on the other hand, were much more confident that this wouldn’t happen given the March CPI report.

Although the economy is booming by many indicators, including last month’s blowout jobs report, small business owners aren’t feeling enthusiastic about it.

An index produced by the National Federation of Independent Business assessing small business owners’ expectations for the future fell to its lowest level since 2012 last month.

The main contributor to this decline is the significant decline in the share of business owners who expect their inflation-adjusted sales to be higher over the next three months compared to current levels.

“The small business sector is showing signs of a potential slowdown,” NFIB President Holly Wade and Bill Dunkelberg, the trade organization’s chief economist, said in a report released Tuesday. “The continued stress of managing inflationary pressures is the main business problem,” they added.

Higher inflation also weighs on consumers who are carrying record levels of credit card debt.

And the highest share of consumers since the start of the pandemic said they were unsure they could make their minimum debt payment on time, according to the New York Fed’s monthly survey of consumer expectations released Monday .

Across all age groups, the increase was most marked among those aged 40 to 60. This is important because this cohort experiences an even lower unemployment rate than the country as a whole.