Inflation Surge Anticipated in 2024: Fed's Uphill Battle with Rate Hikes and Economic Shifts
Summary:
The December Federal Open Market Committee meeting benefited risk asset markets, including cryptocurrencies. However, a potential shock in 2024 could occur as the Federal Reserve struggles with increasing prices, possibly requiring further rate hikes to attain their 2% inflation goal. Economic analysis suggests inflation may rise again, ending the year at around 3.5% and persisting until 2024. This could pose a difficulty for the Fed, tasked with maintaining price stability and optimal employment. Besides, structural economic alterations that could stimulate inflation might be overlooked by policymakers. The real estate market remains robust in spite of increased interest rates, contributing to persistent inflation as we near 2024. The combination of these factors could result in a surge in inflation in December, potentially posing a challenge for policymakers in the new year.
The Federal Open Market Committee's meeting in December proved highly beneficial to markets, causing risk assets including cryptocurrencies to climb as the central bank seemed to take a softer approach to fiscal policy. However, a potential shock could be in store by 2024 as the Federal Reserve grapples with the challenge of climbing prices, potentially necessitating further interest rate hikes to achieve their 2% inflation goal. At present, the general sentiment is that the Fed has successfully contained inflation, but economic studies suggest otherwise. In all likelihood, inflation will see a surge again next month, ending the year at approximately 3.5%, and staying resilient until 2024. This creates a potential hindrance for the Fed, which is tasked with managing both price stability and optimal employment. While they have been largely successful in managing employment, with unemployment rates remaining historically low and moving from 3.9% in October to 3.7% in November, and 199,000 jobs added in November surpassing forecasts. Wage growth also continued its five-month streak in October, rising again to 5.7%. All these factors demonstrate a boost in consumer spending confidence. Despite Fed Chairman Jerome Powell's remarks that consumers have purchased excessively, personal spending still saw an increase of 2.1% to $18.86 trillion in November. The essential economic deceleration needed to bring inflation to the targeted level seems to be nowhere in sight. The persistent rise in service prices, accounting for a significant 42% of the US CPI index, is due partly to the tight job market and wage increase. Economists anticipate inflation to remain persistent for longer than both the market and Fed have projected. Besides, a series of structural economic transitions that could fuel inflation may be ignored by policymakers. The gradual shift from globalization towards protectionism, for instance, has increased mentions of reshoring, nearshoring, and onshoring in American companies' earnings calls by 216% annually since 2022 began. However, the decision to manufacture domestically would inevitably lead to costlier products in comparison to those manufactured in China. This trend is further amplified by governmental spending in infrastructure, green technology, innovation, and the semiconductor supply chain. The steep increase in capital cost resulting from the Fed's rate hikes also poses a problem, especially if the rates remain high, resulting in setbacks for innovation as startups struggle to secure funding. The hoped-for productivity increments from artificial intelligence may also be delayed by three to four years, causing industries to scramble to fill the gap in the short term. A demographic shift over the past 50 years it is characterized by a decline in middle-income households and a surge in both lower and higher-income households. This demographic transformation has sparked a spending spree, most significantly in the real estate market, which has remained robust in spite of soaring interest rates. The Bureau of Labor Statistics reported another monthly surge in the shelter category, showing a steady increase for 43 months. However, as per real-time CPI data, there was a decrease of 0.68% in November, but a closer look reflects a high demand bottomed on limited supply. This inevitably exacerbates the housing affordability issue and contributes to sticky inflation as we approach 2024. Although prices in this category have risen in recent weeks, transportation costs – a significant inflation contributor – dropped in November due to falling oil prices. However, the ongoing crisis in Gaza and planned OPEC+ production reductions are already causing fuel prices to escalate. These factors combined are expected to trigger a surge in inflation in December, causing potential difficulties for policymakers as the new year begins. The FOMC may have appeared dovish recently, but Powell's commitment to a 2% inflation rate remains unwavering. Come 2024, he may advocate another rate hike to uphold this commitment. Thus, it is probably too premature for the markets to celebrate victory. Authored by Oliver Rust, an inflation data aggregator at Truflation. Rust previously held the post of CEO at Engine Insights and global senior vice president of financial services for The Nielsen Company. This article does not offer or advocate for legal or investment advice, and solely reflects the author’s views which may not necessarily mirror those of Cointelegraph.
Published At
12/15/2023 1:36:57 AM
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