The US May Need to Re-Energize Its Fight Against Inflation

There is growing evidence that market participants, policymakers and even a few economists have been hasty to declare victory on behalf of the US Federal Reserve in the fight against inflation.

Now, an increasing number of economic data releases are giving a hint that the US has entered “sticky inflation” territory. Inflation was initially most visible in the form of high food and energy prices followed by a generalized increase in most goods. However, some early inflation figures for 2023, promising as they appeared, may not have been the disinflation many market players were expecting.

Investors yearning for a return to “normal” have been frustrated by persistent inflation. Even Federal Reserve Chair Jay Powell made noticeably dovish noises during his February 1 press policy announcement.

Some market participants have been quick to price in not just a lower peak policy rate for this cycle, but also cuts for the second half of the year. As a result, stocks, bonds and some cryptos like Bitcoin climbed in price. However, in the background, there has been upside data for inflation, jobs and activity. Equities are sliding back while bond yields are edging higher.

There is now growing recognition of the limits to goods disinflation and that price increases in the services sector and others might remain stubborn. With “sticky inflation” seemingly a reality, Fed officials are retreating to a more careful tone with some even suggesting reversing the February 1 downgrade in rate increases from 0.50 to 0.25 percentage points.