Rate Cut in March Less Likely Amid Rising Inflation and Tight Labor Market

Summary

  • The labor market, economy, and inflation data have given rise to speculations about a less likely rate cut in March.
  • The percentage of people filing new unemployment claims dropped last week, and the economy added 216,000 jobs in November.
  • Given the rise in housing and food costs, the inflation risk persists for President Biden.
  • Despite the volatile food and energy components, the core Consumer Price Index (CPI) rose owing to increased rents.
  • The resilient labor market with elevated wage growth nurtures speculations for a rate cut in May or June.
  • Further data about state unemployment benefits and continuing claims indicated a steady labor market.

Labor Market Strength Impacts Rate Cut Expectations

On Thursday, data hinted at shrinking expectations for a rate cut in March, fueled by a robust labor market at the dawn of the year. The number of new unemployment claims fell, referring to an unforeseen drop last week. It adds to the financial narrative trailing the news from the previous Friday about the addition of 216,000 jobs in November and the stirring pace of annual wage growth.

Robust Inflation Data and Possibilities of Rate Cut

As per Charlie Ripley, the senior investment strategist at Allianz Investment Management, “The inflation data currently makes the prospect of a March rate cut less likely.” In addition to a 0.1% rise in November, the Consumer Price Index (CPI) augmented by 0.3% last month. It was significantly influenced by shelter costs.

Rising Inflation: A Political Challenge

Given the rigorous inflation pattern, President Joe Biden faces political risk in his bid for a second term in the White House.

Rents and Food Prices Drive CPI

Rising shelter and food prices, including groceries and eggs, significantly contributed to the uptick in the CPI index lately. Yet, certain prices, namely those of breakfast cereals and vegetables, experienced a downslide.

Inflationary Trends and Financial Markets

Persistently high rents restrict consumer inflation progress, while financial markets adjust the likelihood for a March rate cut, viewing the data statistics unveiled.

Core CPI: Rents and Housing

Excluding the volatile food and energy categories, an increased trend in rents drove the core CPI up 0.3%, matching the November rise.

Rental Inflation and the labor Market

Rental inflation remains high, despite signs of easing demand for rental housing and an abundant stock of apartment buildings soon to hit the market. The labor market is also gradually stabilizing, as unemployment claims fall and employers retain labor in a post-pandemic scenario.

Looking at the financial signals, this data could have significant implications for foreign exchange or trading, potentially affecting the dollar and other currency pairs. It can also impact treasury prices and the broader stock market.

PIP Penguin
Logo