Inflation, Tariffs, Spreads…Hike?
Moody's Talks - Inside Economics
Deep Dive
Why is inflation showing signs of stickiness?
Inflation is sticky due to persistent price increases in categories like shelter, medical care services, and goods such as vehicles. Shelter prices, which make up a significant portion of the CPI, are moderating but still elevated. Medical care services are also seeing gradual price increases, while goods prices, which had been declining, have started to rise again.
What role do food prices play in the current inflation trend?
Food prices, particularly eggs, have shown volatility, contributing to upward pressure on headline CPI. However, this impact is seen as temporary, as food prices are expected to stabilize after a period of mild increases.
Why have vehicle prices started to rise after a period of decline?
Vehicle prices have risen due to a combination of factors, including potential supply disruptions from natural disasters like hurricanes, which have reduced the availability of used cars. Additionally, the automotive market may be reaching a better balance between supply and demand after prolonged production constraints.
How does the Producer Price Index (PPI) reflect current economic conditions?
The PPI showed a 0.4% increase in November, slightly stronger than expected, driven by services PPI, which rose by 0.2%. This suggests that inflationary pressures are present in the production pipeline, particularly in services, which are more wage-driven and slower to adjust.
What are market expectations for the Fed's interest rate decision next week?
Market participants are highly confident (97%) that the Fed will cut rates by 25 basis points next week. However, expectations for further cuts in 2025 are less certain, with a wide dispersion of possibilities ranging from no cuts to potential rate hikes.
How does the current economic growth impact the Fed's monetary policy?
Economic growth, as indicated by a 3.9% annualized GDP estimate for Q4 2024, suggests a strong economy. This robust growth, combined with tight labor markets, argues for a pause in rate cuts, potentially even leaning towards a rate hike to prevent overheating.
What are the implications of financial conditions on monetary policy?
Financial conditions, characterized by frothy asset prices (e.g., stocks, crypto) and tight credit standards, suggest easing conditions that could fuel further economic growth. This easing, particularly in asset markets, argues for a pause or even a rate hike to curb potential inflationary pressures.
How might tariffs and immigration policies affect the economy in 2025?
Tariffs and immigration policies, particularly deportations, are expected to act as negative supply shocks, leading to higher inflation and diminished economic growth. These policies could push the Fed towards raising rates to manage inflationary pressures.
What is the significance of the high yield corporate bond spread being at 266 basis points?
The high yield corporate bond spread is currently at 266 basis points, the second-lowest in 30 years. This indicates very easy financial conditions, as investors are highly optimistic about corporate cash flows. Such a tight spread could signal a potential financial crisis if optimism wanes, similar to the lead-up to the 2008 financial crisis.
- Headline CPI rose 0.3% in November, lifting the year-ago rate to 2.7%
- Core CPI (excluding food and energy) rose 0.3%, remaining at 3.3% year-over-year
- Stickiness in inflation is attributed to shelter prices and upward pressure from core goods and food prices
- Vehicle prices, previously declining, have started to increase, contributing to the stickiness
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