Spike in inflation sinks hopes for further federal rate cuts

@THEMARKET

For the fourth straight month, the Consumer Price Index registered higher inflation. That has dashed any hope that the U.S. central bank would loosen monetary policy further in the months ahead. And now the country faces even higher prices if tariffs go into effect.

The most recent University of Michigan survey of consumers indicated that inflation expectations for the next year increased to 4.3 percent in February.

That is one percentage point higher than January and the highest since November 2023.

Wednesday's Consumer Price Index data for January increased 3 percent over the prior year and 0.5 percent over the previous month. That surprised markets but came in spot-on with my forecast. As readers are aware, I have been warning investors since October that inflation was climbing, and it has done so for the last four months.

While a stunned Wall Street pointed to seasonal factors as the culprit, we all know that is a load of bull dinky. The latest inflation numbers were higher in almost everything: autos, insurance, drugs, rent, housing, education restaurants, groceries - the list goes on. On Thursday the Producer Price Index echoed the increases in the CPI with U.S. factory gate prices rising 0.4 percent month over month.

Federal Reserve Bank Chair Jerome Powell, who was testifying before the House as the numbers were announced, conceded that "we're close but not there on inflation."

He had already advised the market not to expect rate cuts and reiterated that "we want to keep policy restrictive for now."

With no help from the Fed, where does that leave the markets? Waiting for Donald Trump's tariff onslaught. There are relatively few in the financial markets who believe that tariffs will not add fuel to the inflation fire. Since the election, even the president and his cabinet have admitted that Americans will feel "pain" in the short term from his policies.

It may be why he did not implement reciprocal tariffs on foreign nations on Thursday. Instead, he signed a memorandum to "review" such tariffs. That gives him time to negotiate with our trading partners without adding tariff pressure to the inflation rate.

Critics also say that government spending has been a big part of U.S. economic growth. If you add up lost federal jobs, declines in immigrant labor and the fallout from the reduction in the size of government overall, the impact on the economy will result in a period of slower growth.

In which case, my forecast of a bout of stagflation will prove accurate.

However, before you run for the hills, there may be some silver linings in these storm clouds. Peace in the Middle East and between Ukraine and Russia would go a long way in reducing the price of oil. And oil, as you know, is a big factor in the inflation equation. Energy prices have declined for several weeks, and I expect that to continue. It is one reason I see a decline in the CPI for next month.

I also believe Trump's tariff strategy is a means to an end and not a permanent fixture in the global economic landscape. He was elected primarily to solve inflation and while he can still blame this month's spike in inflation on Biden, he can't do that forever.

Looking back through history, voters in populist times have a short fuse.

They expect politicians' promises to be kept, and soon, especially when it comes to bread-and-butter issues like groceries.

The pressure to succeed in a trade war needs to be weighed against the damage it causes on the inflation front.

And yes, we may see a dip in economic growth because of reduced spending and increased efficiency throughout the government, but it should also put a dent in the deficit and hopefully reduce the country's debt load.

The stock market appears to have taken the hotter inflation news in stride.

However, I think much of the gains this week had more to do with the delay in reciprocal tariffs rather than inflation fears. Was it an accident or leaked information on tariffs that turned the averages around on Wednesday as they plummeted after the CPI print? The S&P 500 Index climbed further on Thursday completely ignoring the hotter PPI.

In any case, I have repeatedly warned readers not to tariff trade. Trump has a long history of using the media to broadcast one intention while doing the exact opposite behind the scenes. My buy-the-dip strategy over the last few weeks seems to be paying off as has my recommendation to buy China and precious metals.

Volatility will remain the game but, I am looking for new highs in the days ahead.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401, or email him at [email protected].