The slew of recent data underscores inflation stickiness. While the initial phase of disinflation came quickly with the reversal of pandemic supply shocks, price increases are now underpinned by strong aggregate demand, from both consumer spending as well as government deficit spending. For instance, the Biden administration is doling out billions in subsidies to the semiconductor industry, to spur domestic manufacturing. Even the US$61 billion in aid to Ukraine (that just passed Congress) will first go through the US economy — sending existing weapons stockpile to Ukraine and replenishing its inventory with new weapons manufactured domestically.
The latest US GDP growth and inflation data further cemented the market’s pivot towards higher-for-longer US interest rates, and its effects are reverberating around the world. Higher-for-longer US interest rates have implications not just for the US but also the rest of the world, owing to the importance of the US dollar in trade and the global financial system, as well as the resulting effects on exchange rates.
The first reading for GDP growth for 1Q2024 came in at 1.6% annualised — below market expectations of roughly 2.4%. But the weakness in the headline figure is due primarily to inventory drawdown and lower net export, which tend to be volatile. Importantly, consumption, which is the main driver for growth, remained resilient. In fact, consumer spending on services grew at a faster clip compared to 4Q2023. And, more critically, the core personal consumption expenditure (PCE, excluding food and energy) price index, the Federal Reserve’s preferred inflation gauge, rose at an annualised rate of 3.7% in 1Q2024, up sharply from 1.8% in 4Q2023 and above the recently revised upwards market forecast of 3.4%.
