America’s inflation problem has improved greatly in some respects — but it remains stubborn for the price of services.
That means the Federal Reserve, which is tasked with stabilizing prices, could keep interest rates higher for longer if the rising costs of your haircut, your doctor’s visit and other services don’t abate soon.
Price growth has slowed steadily over the past year but it’s been a bit of a bumpy ride. For example, inflation in January didn’t slow as much as investors were expecting, largely due to persistent price pressures in housing and services.
Overall, consumer prices rose 0.3% in January 2024 from December 2023, according to the latest Consumer Price Index. That’s the biggest monthly increase since September.
Inflation of goods continued to slow. But spikes in services costs were significant enough to bring overall consumer prices higher: Medical care services costs rose by 0.7%, as did the price of haircuts. Insurance and financial services also pushed inflation higher.
These trends were echoed in the Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — within the report, which similarly showed that services prices were stable at the beginning of the year.
January’s disappointing inflation readings prompted investors to recalibrate their expectations on rate cuts. At one point, Wall Street had high hopes that rate cuts would begin this month and that the Fed could cut rates as much as six times this year. Those expectations have been thrown out the window.
The Labor Department releases its Consumer Price Index for February on Tuesday.
Before the Bell spoke with Saira Malik, chief investment officer at Nuveen, about what’s going on with services inflation and why that’s important for the Fed.
This interview has been edited for length and clarity.
Before the Bell: Why is services inflation such a headache for Fed officials?
Saira Malik: They’ve been pretty clear that they want to see broad disinflation and the slower inflation that we’ve seen has been goods focused and not as much on services. That’s one of the key issues as to why the Fed will cut rates later in the year than people expected at the beginning of this year.
I’ve been expecting about three rate cuts this year starting this summer and the reason for that is because we thought inflation would prove to be stickier and the economy to be stronger. The drivers of services inflation have been threefold: Vehicle insurance, hospital insurance, and financial services. Two of those are structural, and one of those is temporary.
What does this mean for the Fed’s challenge of figuring out when is the best time to start cutting interest rates?
The Fed doesn’t want to lose credibility by cutting interest rates too soon. Officials are watching the consumer and the employment market because while inflation is sticky, the economy is also strong in the face of higher rates and inflation. So, as long as the economy can hold up in this kind of elevated interest rate and inflation period, I don’t think the Fed needs to rush to cut rates. That decreases the chances of them cutting so late that we enter into a deep recession. On the one hand they’re watching to see if disinflation will broaden out beyond goods and on the other hand, they’re watching the economy closely to see if it’s showing signs of slowing.
Despite those concerns of inflation stalling, more investors are now pricing in a soft landing compared to last year when many expected a recession. Wall Street’s bar is higher now, so what could happen if we get any more disappointing inflation reports?
The markets are definitely more fragile at this point versus where we were at the beginning of 2023 because market valuations are at a premium now. Valuations are pricing in a soft landing on continued strength in technology stock. I do think if we get more disappointing news from data showing that inflation may be speeding up, that could be taken as bad news by investors in the sense that it will continuously delay rate cuts. That could make it challenging for markets to hold on to their valuation.
Biden says he can fix America’s housing affordability crisis. Will it work?
Americans are in the throes of the worst housing affordability crisis in decades. Baby Boomers aren’t parting with their homes, insurance costs are skyrocketing, mortgage rates are sky-high and half of renters say they can’t afford their monthly payment. Some have given up on ever owning a home.
The problem has been years in the making and economists agree it can’t be easily solved. But President Joe Biden said during Thursday’s State of the Union address that the government has a fix up its sleeve.
“I know the cost of housing is so important to you. If inflation keeps coming down, mortgage rates will come down as well. But I’m not waiting,” he said.
Affordable housing advocates praised Biden’s plan to help would-be homeowners afford to buy. But critics say Biden’s plan could only exacerbate the problem by creating even more demand for homes without sufficiently addressing the key factor behind the crisis: America just doesn’t have enough homes.
Biden proposed Thursday several actions, including new tax credits and legislation to increase homebuilding, to improve housing affordability and increase the number of homes to buy or rent.
Up Next
Monday: Earnings from Oracle, Asana and Vail Resorts.
Tuesday: Earnings from Kohl’s and Guess. The US Labor Department releases its Consumer Price Index for February. The US Treasury Department releases its monthly budget statement for February.
Wednesday: Earnings from Lennar, Dollar Tree and Petco. The UK’s Office for National Statistics releases January figures on gross domestic product and trade.
Thursday: Earnings from Adobe, Dollar General, Ulta Beauty, Dick’s Sporting Goods, Getty Images, Build-A-Bear Workshop and Zumiez. The US Labor Department releases its Producer Price Index for February in addition to the number of new applications for jobless benefits in the week ended on March 9. The US Commerce Department releases February figures on retail sales in addition to January data on business inventories.
Friday: The US Labor Department reports export and import prices in February. The New York Fed releases its Empire State Manufacturing Index for March. The Federal Reserve releases February figures on industrial production. The University of Michigan releases its preliminary reading of consumer sentiment in March.
