Inflation, as measured by the Consumer Price Index, rose a scant 0.1% in May on a seasonally adjusted basis, and the Federal Reserve may be done with raising interest rates, while economic growth is stronger than expected. The list of bullish fundamentals is much longer than the list of bearish signals, and a turning point in the outlook could be taking hold.
The U.S. economy created 311,000 new jobs in February, exceeding expectations of 225,000, according to the Bureau of Labor Statistics. The unemployment rate edged upward to 3.6%, but remains just above its lowest point in decades.
The 12-month rate of inflation rose in January, according to newly released data. The Personal Consumption Deflator Expenditure (PCED), the inflation index cited by the Federal Reserve in its policy statements, rose to a 12-month rate of 5.4%. The annualized rate of inflation had been expected to decline, but it rose from 5.3% in the 12 months ended December 2022 to the 5.4% annualized rate. It was a disappointment. It means the aggressive monetary tightening campaign begun in March 2022 may be extended.
For the ninth straight month, the Leading Economic Index® (LEI) for the U.S. declined in January 2023. According to data released Friday morning, the LEI dropped by three-tenths of 1%, following an eight-tenths of 1% plunge in December. Although the rate of decline in the LEI slowed in January, the collapse of the LEI historically foreshadows recession. The LEI collapsed before every recession in modern financial history except for the Covid-19 recession.
Look for the Federal Reserve Board’s policy statement on Wednesday, February 1st to help determine whether the inflation crisis ends in a recession.
The Federal Reserve is at the tail end of a historic battle against the worst inflation in several decades. The central bank hiked rates seven times since March 2022 and is expected to raise rates again Wednesday, when its policy statement is released at the conclusion of the Federal Open Market Committee’s monthly two-day meeting.