MNI INTERVIEW: Inflation Upturn Could Complicate Fed Cuts-ECRI

U.S. inflation could be on the verge of a rebound that, even if modest, could delay the start of Federal Reserve interest rate cuts that markets hope will come in May, Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, told MNI.

“It’s a risk factor, absolutely,” said Achuthan. “I’m leaning toward the idea that there’s an inflation cycle trough.”

ECRI’s Future Inflation Gauge has flatlined for the better part of a year, he said, an ominous sign for a Federal Reserve considering possible interest rate cuts later this year, especially because global inflation cycles have tended to turn in tandem in the last two decades.

“It stopped falling and it stopped falling a long time ago,” he said.

Achuthan, who has advised institutions and central banks including the Bank of England and the RBI, said 10 of the 11 major economies for which they track longer leading indexes of inflation are showing a cycle upturn. The U.S. economy is for now the exception, but Achuthan thinks it’s only a matter of time. (MNI INTERVIEW: US Service Growth Resilient, Prices Too- ISM)

“International inflation cycles have been pretty well synchronized this century,” he said.

FOAM ON THE RUNWAY

Ongoing inflation pressures could be due in part to the lingering effects of various rounds of fiscal stimulus that many economists say have diluted the impact of the Fed’s aggressive monetary policy tightening, which took rates from effectively zero to as high as 5.5% in a matter of 16 months. Achuthan said.

“If there’s going to be this much support for the economy – if you put this much foam on the runway – maybe it’s hard to have a hard landing. The level of that activity is staying up there because there’s not a lot of shovel-ready projects, that stuff is still leaking out,” he said.

“If the fiscal offset eases, I think we’re still vulnerable to negative shocks, but that’s a big if. Regardless of whether you’re a Republican or a Democrat you like to spend money in an election year.” (MNI: US Shelter Inflation Cooldown Seen Limited In 2024)

The risk of another leg up on inflation is particularly worrisome at a time when markets are disproportionately positioned for looser monetary policy ahead.

“So much of the narrative is predicated on central banks pivoting toward easing,” said Achuthan.

JOB WORRIES

Achuthan said job market conditions have been gradually deteriorating despite last week’s shockingly strong payrolls report for January, adding a soft landing is not assured.

“On the job market part of it – these guys forget Minsky – ‘Look, it’s been pretty good for a few months so it’s going to be good.’ That’s not a good way to steer yourself on a curvy road,” he said.

“January is a screwy number, you have all the job losses, and if we’re in a labor hoarding mode, then we didn’t lose quite as many as the seasonal adjustments suggest, you could get a blowout number. Year-over-year job growth is trending down, it feels like a labor market that’s been hollowing out but the headlines have been flattering.”