Fresh data on inflation, jobs could force Fed to rethink rate cuts

The Federal Reserve’s path to cutting interest rates later this year just got a bit more complicated thanks to fresh data showing that inflation continues to remain stubbornly high while the job market is staying hot.

The Producer Price Index, which measures wholesale inflation, rose 0.6% in February, the Labor Department said on Thursday — doubling the 0.3% forecast from Dow Jones and the 0.3% gain registered in January.

Core PPI, which excludes food and energy, rose 0.3%, outstripping estimates who forecast a 0.2% increase, according to data released by the Bureau of Labor Statistics.

Fed Chair Jerome Powell has urged investors to be patient as they clamor for interest rate cuts. Getty Images

Earlier this week, the federal government reported that the main inflation gauge, the Consumer Price Index, rose 3.2% last month versus a year earlier, above January’s 3.1% annual pace.

The stronger-than-expected CPI numbers has effectively shut the door on the possibility of an interest rate cut before June.

Fed policymakers are likely to leave the policy rate in the range of 5.25% to 5.5% when they meet next week.

Economic observers are now bracing for the February data on the personal consumption expenditures price index (PCE), the Fed’s preferred gauge of where inflation is headed.

PCE data is expected to be unveiled later this month, though experts warn that another strong number could make policymakers at the central bank think twice about cutting rates.

“Six weeks ago, the FOMC was seeking ‘greater confidence’ that inflation was moving back to 2% and since then, we have gotten nothing but bad news on the inflation front,” Stephen Stanley, chief US economist at Santander US Capital Markets, said in a note to clients earlier reported on by Bloomberg.

Retail figures show that consumers have cut back on spending due to high levels of inflation. Getty Images

Another key factor that could cause the Fed to delay interest rate cuts is a tight labor market. 

Job growth accelerated in February, but that likely masks underlying softening labor market conditions as the unemployment rate increased to a two-year high of 3.9%.

The Labor Department’s closely watched employment report from last Friday also showed wages rising moderately last month. 

Inflation has remained high — shutting the door on the possibility of rate cuts before June. Getty Images

The jump in the unemployment rate after holding at 3.7% for three straight months reflected a further decline in household employment. 

Fewer Americans applied for unemployment benefits last week and annual revisions to the weekly claims data showed laid-off workers were quickly finding new work and not spending as long a period of time on jobless benefits as had been previously thought.

Meanwhile, retail sales rose just 0.6% last month, the Commerce Department’s Census Bureau said – shy of the 0.8% that was forecast by economists.

The Fed has yet to see signs that would justify rate cuts before June. Getty Images

Data for January also was revised lower to show sales tumbling 1.1% instead of the previously reported 0.8%.

Sales in December were also downgraded.

“The retail sales report this month supports our view that the economy is strong but cooling,” Morgan Stanley economist Ellen Zentner said in a report. “There is no reason for the Fed to rush the next move in rates.”

With Post Wires

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