Hotter-Than-Expected Inflation Clouds Rate-Cut Outlook - Kanebridge News
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Hotter-Than-Expected Inflation Clouds Rate-Cut Outlook

Wed, Feb 14, 2024 9:04amGrey Clock 4 min

US: Inflation eased again in January but came in above Wall Street’s expectations, clouding the Federal Reserve’s path to rate cuts and potentially giving the central bank breathing space to wait until the middle of the year.

The Labor Department reported Tuesday that consumer prices rose 3.1% in January from a year earlier, versus a December gain of 3.4%. That marked the lowest reading since June.

Still, the consumer-price index was higher than the predicted 2.9%, a disappointment for investors who hope the Fed will cut rates sooner rather than later. Rate cuts tend to help stock prices by boosting economic activity and reducing competition from bonds for investor dollars.

The release gave a nasty jolt to markets. Stocks fell sharply and bond yields rose. The Dow Jones Industrial Average slid more than 500 points, or about 1.4%, its worst one-day decline since March. For all three major U.S. stock indexes, it was their worst performance on a CPI release day since September 2022 , according to Dow Jones Market Data.

The yield on the 10-year Treasury note rose to 4.315%, bringing it to its highest level since the end of November.

Interest-rate futures, which before Tuesday’s report implied the central bank would probably begin cutting rates by its May meeting, now suggest a June start date is more likely.

Where the Fed could go from here

Investors’ belief that Fed cuts were imminent has helped fuel the rally in stocks. The Dow on Monday had hit its 12th record close of 2024.

But Tuesday’s inflation report underscores why Fed officials have been dismissive of such expectations. Some Fed officials have suggested that the pace of improvement over the past six months might overstate underlying progress in containing price pressures.

Officials have said they aren’t ready to entertain rate cuts at their next meeting, March 19-20, because they want to see more evidence that inflation is returning to their 2% target.

Fed Chair Jerome Powell has said officials want to see more evidence that inflation is returning to its 2% goal, which is measured against a separate gauge to be released later this month by the Commerce Department.

“It’s not that the data aren’t good enough. It’s that there’s really six months of data,” Powell said in an interview on “60 Minutes” earlier this month. “It doesn’t need to be better than what we’ve seen, or even as good. It just needs to be good.”

Core prices, which exclude food and energy items in an effort to better track inflation’s underlying trend, were up 3.9% in January. That was equal to December’s gain, which was the lowest since mid-2021.

From a month earlier, overall prices were up a seasonally adjusted 0.3%, and core prices were up 0.4%—larger gains than economists expected.

Two measures of inflation

The Fed’s preferred measure of inflation has been running cooler than the Labor Department’s, and analysts said that could continue in January. The figures released Tuesday calculate medical care and airfares differently, and those categories were especially strong in January. The Labor Department’s measure also puts a much higher weight on shelter costs, which for both owners and renters are derived from rents. Shelter costs accounted for 0.23 percentage point of the monthly gain in overall prices in January. Shelter costs were up 0.6% month over month.

Some Fed officials have said they are looking for evidence that a slowdown in price pressures is broadening beyond goods such as used cars, which have seen prices decline over the past year. Tuesday’s figure showed the opposite: Price declines accelerated for goods while price increases accelerated for services.

And prices are still far above where they were before the pandemic—especially for items   that most Americans buy often, like groceries.

The sting of those past price increases might be part of why so many Americans remain down on the economy . An analysis conducted by Goldman Sachs economists suggests that frustration with high price levels might have contributed to low confidence readings that persisted in the early 1980s even after inflation had slipped sharply.

“It does seem like it takes a while for confidence to recover, in part because people are focused on levels rather than changes,” said Goldman chief economist Jan Hatzius .

The Labor Department’s measure of overall consumer prices was up 19.6% this January from four years earlier, just before the pandemic hit. In contrast, prices were up 8.9% in the four years ended January 2020.

Economists generally expect inflation to cool this year, though they caution the process could be bumpy. Cooling prices for newly signed leases, for example, should eventually translate into lower shelter costs.

“I can tell inflation has gotten better,” said Mike Poore, of Henderson, Ky. “That’s definitely a good thing. It’s a shame it’s not happening quicker.”

The high cost of groceries

A Bank of America Institute analysis of customer data found households tended to make far more transactions a month for food and drinks at restaurants and bars, for groceries and for gasoline than they do for other items. Labor Department figures show that prices in all three of those frequent-transaction categories are higher, relative to before the pandemic, than prices overall.

Research from University of California, Berkeley economist Ulrike Malmendier and three co-authors found that prices for items that people buy more often play an outsize role in framing their inflation expectations. “In terms of what gets ingrained in people’s brains, it’s stuff that they purchase frequently,” she said.

Other research Malmendier has conducted examines the scarring effects of inflation episodes , which can have persistent, and potentially costly, effects on people’s financial decisions. She is heartened by the fact that inflation has retreated relatively quickly from the 9.1% it hit in June 2022 —a contrast to the experience of the late 1970s and early 1980s, when inflation remained elevated for years.

“I’m a little less worried about long-lasting effects than I was in 2022,” she said.


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Some chocolatiers and coffee makers say they will have to pass on the extra cost to consumers

Sun, Apr 14, 2024 4 min

Global prices for cocoa and coffee are surging as severe weather events hamper production in key regions, raising questions from farm to table over the long-term damage climate change could have on soft commodities.

Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide.

“Adverse weather conditions, mostly in the Southern Hemisphere, have played an important role in sending several food commodities sharply higher,” said Ole Hansen , head of commodity strategy at Saxo Bank.

The spikes in prices are a threat to coffee and chocolate makers across the globe.

Swiss consumer-goods giant Nestlé was able to pass only a fraction of the cocoa price increase to customers last year, and it may need to adjust pricing in the future due to persistently high prices, a spokesperson said.

Italian coffee maker Lavazza reported revenue of more than $3 billion for last year, but said profitability was hit by soaring coffee bean prices, particularly for green and Robusta coffee, and its decision to limit price increases.

Likewise, chocolatier Chocoladefabriken Lindt & Spruengli said in its 2023 results that weather and climate conditions played a major role in the global shortage of cocoa beans that led to historically high prices. The company had to lift the sales prices of its products and said it would need to further raise them this year and next if cocoa prices remain at current levels.

Hershey ’s chief executive, Michele Buck , said in February that historic cocoa prices are expected to limit earnings growth this year, and that the company plans to use “every tool in its toolbox,” including price hikes, to manage the impact on business.

In West Africa, where about 70% of global cocoa is produced, powerhouses Ivory Coast and Ghana are facing catastrophic harvests this season as El Niño—the pattern of above-average sea surface temperatures—led to unseasonal heavy rainfalls followed by strong heat waves.

Extreme heat has weakened cocoa trees already damaged from heavy rainfall at the end of last year, according to Morningstar DBRS’s Aarti Magan and Moritz Steinbauer. The rain also worsened road conditions, disrupting cocoa bean deliveries to export ports.

The International Cocoa Organization—a global body composed of cocoa producing and consuming member countries—said in its latest monthly report that it expects the global supply deficit to widen to 374,000 metric tons in the 2023-24 season, from 74,000 tons last season. Global cocoa supply is anticipated to decline by almost 11% to 4.449 million tons when compared with 2022-23.

“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavourable weather conditions and diseases,” the organisation said.

While the effects of climate change are severe, other serious structural issues are also hitting West African cocoa production in the short- to medium-term. Illegal mining poses a significant threat to cocoa farms in Ghana, destroying arable land and poisoning water supplies, and the problem is becoming increasingly relevant in the Ivory Coast, according to BMI.

The issues are being magnified by deforestation carried out to increase cocoa production. Since 1950, Ivory Coast has lost around 90% of its forests, while Ghana has lost around 65% over the same period. This has driven farmers to areas less suited to cocoa cultivation like grasslands, increasing the amount of labor required and bringing further downside risks to the harvest, the research firm said.

The Ivory Coast’s cocoa mid-crop harvest—which officially starts in April and runs until September—is expected to fall to 400,000-500,000 tons from 600,000-620,000 tons last year, with weather expected to play a crucial role in shaping the market balance for the season, ING analysts said, citing estimates from the country’s cocoa regulator. Ghana’s cocoa board also forecasts a slump in the harvest for this season to as low as 422,500 tons, the poorest in more than 20 years, according to BMI.

Neither regulator responded to a request for comment.

Meanwhile, extreme droughts in Southeast Asia—particularly in Vietnam and Indonesia—are resulting in lower coffee bean harvests, hurting producers’ output and global exports. Coffee inventories have recovered somewhat in recent weeks but remain low in recent historical terms. Robusta coffee has seen a severe deterioration in export expectations, while Arabica coffee is expected to return to a relatively narrow surplus this year, said Charles Hart, senior commodities analyst at BMI.

The global coffee benchmark prices, London Robusta futures, are up by 15% on-month to $3,825 a ton. Arabica coffee prices have also surged 17% over the last month to $2.16 a pound in lockstep with Robusta—its highest level since October 2022. Cocoa prices have more than tripled on-year over these supply crunch fears, and risen 49% in the last month alone to $10,050 a ton.

“Cocoa trees are particularly sensitive to weather and require very specific conditions to grow, this means that cocoa prices are especially vulnerable to extreme weather events, such as drought and periods of intense heat, as well as the longer-term impact of climate change,” said Lucrezia Cogliati, associate commodities analyst at BMI.

Cogliati said global cocoa consumption is expected to outpace production for the third consecutive season, with intense seasonal West African winds and plant diseases contributing to significant declines.

Consumers hoping for a return to cheaper prices for life’s little luxuries in the midterm may also be in for a bitter surprise.

“There is no sugarcoating it—consumers will ultimately be faced with higher chocolate prices, products that contain less chocolate, and/or shrinking product sizes,” Morningstar’s Magan and Steinbauer said in a report.

“We anticipate consumers could respond by searching widely for promotional discounts, trading down to value-based chocolate and confectionary products from premium products, switching to private-label from branded products and/or reducing volumes altogether.”

The record-breaking rally for cocoa and coffee is likely more than just a flash in the pan, according to Citi analysts, as adverse weather conditions and strong demand trends are likely to support prices in the months ahead. The U.S. bank estimates Arabica coffee futures in a range of $1.88-$2.15 a pound for the current year, but said projections could be lifted if the outlook for 2024-25 tightens further.

At the heart of it all, climate change is set to play a major role, as the impact of extreme weather events could exacerbate the pressure on cocoa and coffee supplies, according to market watchers.

“I don’t expect prices to remain at these levels, but if we continue to see more unusual weather as a result of global warming then we certainly could see more volatility in terms of cocoa yields going forward, which could impact pricing,” said Paul Joules, commodities analyst at Rabobank.