With an influx of inflation data, the debate about the Federal Reserve's possible cuts to inflation rates continues. Rabobank Senior Cross-Asset Strategist Christian Lawrence joins Yahoo Finance to break down recent inflation data and why it may change how the Fed should fight inflation.
"When it comes to things like shelter inflation, very little sign of that easing up anytime soon, and we're running at double the pre-COVID trend. I would actually argue that although the plan is to get down to 2%, really, we're in a world now where 2% probably isn't the right target anymore. Remember, 2% really came about in the 1990s with the RBZ and that was the same time that China entered the WTO. While we're not moving to a de-globalized world, we are moving to a world where reglobalization is occurring, more on-shoring, more domestic production, and that is structurally inflationary," Lawrence says.
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- Early US wholesale inflation rising again last month but coming in lighter than expected and that's helping investor sentiment. At least this morning, we're seeing some buying action in early trading here. While the PPI print, though, follows yesterday's CPI report which showed that consumer prices remain elevated and that was enough for investors to push out their expectations for rate cuts.
So where do we go from here? It's the question everyone's asking right now. We want to bring in Christian Lawrence, Rabobank Senior Cross-Asset Macro Strategist. It's great to have you here. So I'm curious just to get your reaction. First, let's start here in the US. So the CPI print, the PPI print does that at all change your expectation in terms of when the Fed is going to act and then ultimately, how they see that path forward getting back to their 2% goal?
CHRISTIAN LAWRENCE: Well, it's great to be here, thank you. So I would say that when it comes to our Fed forecast, we're currently pricing in around about two rate cuts this year, which is now broadly in line with the market. So that's 50 basis points by the end of the year. And we actually only expect another 225 basis point cuts next year. So a total of 1% point by the end of 2025.
And really, this is a reflection of the fact that the inflation dragon has yet to be slain. We know that there are more cost push pressures coming through as a result of supply chain issues earlier in the year, rising energy prices, which we think will continue throughout 2024. And this is all going to be pretty strong pressure on that side.
Meanwhile, when it comes to things like shelter inflation, very little sign of that easing up anytime soon and we're running at double the pre-COVID trend. I would actually argue that although the plan is to get down to 2%, really, we're in a world now where 2% probably isn't the right target anymore. Remember, 2% really came about in the 1990s with the RBNZ and that was the same time that China entered the WTO. And while we're not moving to a deglobalized world, we are moving to a world where reglobalization is occurring. More onshoring, more domestic production, and that is structurally inflationary.
- Well, what's going to make the Fed change that 2% target? They still have stuck to that despite calls like yours to change it. What would make them change their minds?
CHRISTIAN LAWRENCE: Well, they certainly won't change it any time soon. I mean, one could argue that the move to flexible average inflation targeting was a kind of step in that direction. But certainly, we'd need to get much closer to 2% for them to be happy to change that or to think about moving because otherwise, it's essentially admitting defeat. Now when we look at our inflation projections, we do have us going down to 2 and 1/2% in the US but not down to that 2% target over the next few years.
- Well, talk to me then about some of the areas where we are seeing softness in this market because Neil Dutta yesterday really pointing out that we are seeing disinflation pockets across the US particularly when you take a look at the Atlanta Fed wage tracker. We are seeing continuous declines on those wages, which obviously could be a sign of disinflation to come. Is that something that you think this market is ignoring?
CHRISTIAN LAWRENCE: Well, I think there are certainly a few pockets of disinflation in fact, there are some pockets of outright deflation. But I think that those were in the past. So we have seen core goods, for example, being deflationary for a couple of months. And of course, energy prices falling was a deflationary impulse onto the CPI inflation index for some time. But going forward, I think both of those are changing direction.
Now when it comes to wages, this is, of course, the absolute critical point when it comes to that sticky services inflation. And when you look at the structure of the labor market, we did essentially see a mass exodus of over 55's from the workforce, that participation rate dropped quite substantially in the aftermath of COVID. And the likelihood is most of those are not coming back to the workforce.
But of course, we have seen a pick up in migration recently. That will mean more workers. That could mean a little bit less in the way of upward wage pressures. But of course, those people also buy things as well, which acts as an impulse on the upside when it comes to the demand element. So it is a very complicated picture but it's one that I think isn't going to be conducive to that 2% target anytime soon.