American consumers' expected inflation rate over the next five years has surged to its highest level in about six months. This confirms that consumers' concerns about "high inflation becoming entrenched" are actually increasing ahead of the Federal Reserve's (Fed) monetary policy pivot. Market attention is now focused on the Consumer Price Index (CPI). If the February CPI, following January's, exceeds expectations, it could become a variable despite the Fed's indication of three possible rate cuts this year.
According to the February consumer outlook survey released on the 11th (local time) by the New York Federal Reserve Bank, the five-year expected inflation rate, which indicates long-term inflation expectations, recorded 2.9%. This is a 0.4 percentage point increase from the previous month and the highest level since August last year. It suggests that achieving the Fed's inflation target of 2% even after five years is considered difficult. The three-year expected inflation rate also rose by 0.3 percentage points from the previous month to 2.7%.
This contrasts with the Fed's diagnosis, which has stated that "long-term inflation expectations are well anchored," despite concerns about a rebound in inflation circulating in some parts of the market. Expected inflation is one of the key economic indicators closely watched by the market because it influences pricing decisions for various products and services, wage increase demands, and is reflected in inflation. The one-year expected inflation rate released on the same day remained unchanged at 3% from the previous month.
As medium- to long-term inflation expectations rebound, the Fed's dilemma over the interest rate cut option is expected to deepen. The key is the February CPI, which will be released at 8:30 a.m. Eastern Time on the 12th (9:30 p.m. Korean time). Since the January CPI increase was stronger than expected and caused market shock, interest in the February CPI increase is intense. Wall Street expects the February CPI increase to be 3.1%, the same as January. Month-over-month, it is expected to rise by 0.4%, increasing from January's 0.3%.
If the CPI again exceeds market expectations ahead of next week's Federal Open Market Committee (FOMC) meeting, hawkish voices (favoring monetary tightening) emphasizing that the war against inflation is not over will gain more strength. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market currently reflects an 81% probability that the Fed will keep rates steady at the current 5.25?5.5% level until May. The prevailing view is that rate cuts will begin in June.
Bank of America (BoA), presenting a June rate cut scenario, predicted that "if core CPI is higher than expected, the rate cut cycle could be delayed." Citi analyzed that "the impact of the CPI on the stock market will be greater than the Fed's rate decision next week," adding, "A hotter-than-expected CPI could delay the timing of the Fed's rate cuts and act as downward pressure on the stock market."
Wells Fargo raised its annual inflation forecast. The core CPI increase, excluding volatile food and energy, is expected to be 3.3%, higher than the previous 2.8%. Based on the core Personal Consumption Expenditures (PCE) price index, an inflation indicator monitored by the Fed, it also raised its forecast by 0.3 percentage points to 2.5%. Sarah House, Wells Fargo's chief economist, stated in an investor memo, "Progress over the next few months has become less clear. The Fed will need more confidence that it is continuously moving toward its inflation target." The New York stock market closed mixed amid caution ahead of the CPI announcement.
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