(Repeats March 14 item with no changes to text)
By John Kemp
LONDON, March 14 (Reuters) - U.S. consumer prices are
still rising twice as fast as the Federal Reserve's target,
sharpening the dilemma for officials also concerned about
financial stability and the flow of credit following the failure
of Silicon Valley Bank (SVB).
Prices for all items other than energy, food, shelter and
used vehicles increased at an annualised rate of 5.0% in
February and 4.3% over the three months from December to
February.
Energy, food, shelter and used vehicles are the most
volatile items in the price index; excluding them can provide a
clearer picture of the underlying increase in prices across the
economy.
Such "supercore" inflation has decelerated from a
post-pandemic peak of 7-8% in the first half of 2022 but is
still running much faster than the central bank’s declared
flexible average inflation target of a little over 2%.
From developments over the last few months, it is not clear
whether core inflation is already converging, albeit slowly, on
the target - or if a further tightening of monetary conditions
will be necessary.
Even without the most volatile items, the core rate remains
very variable from one month to the next; variability tends to
increase when inflation itself is running high, as it has been
over the last two years.
Rapid and volatile inflation is significantly complicating
planning for policymakers as well as businesses and households,
which is why most economists agree it is burden on the economy.
The Fed has already boosted overnight interest rates by 450
basis points over the last 12 months to 4.50-4.75%, causing the
biggest inversion of the yield curve since the double-dip
recession in 1981.
Silicon Valley Bank’s failure on March 10 has dramatized the
increasing pressure on the country’s small and medium-sized
regional banks as well as the possible build up of hidden risks
in other parts of the financial system.
Interest rate traders currently expect the central bank to
raise its overnight rate one more time by 25 basis points to
4.75-5.00% when policymakers meet on March 21-22.
But then rate cuts are expected to begin as early as May or
June as credit conditions tighten and economic activity and
inflation slows.
Chartbook: U.S. inflation, interest rates and oil prices
Raising rates one more time would signal continued concern
about inflation before lowering them to maintain financial
stability, keep credit flowing to households and businesses, and
ensure a soft landing is one scenario.
But it is also possible persistent inflation will force the
central bank to raise interest rates further, or that an abrupt
and unplanned tightening of credit conditions will force a much
faster reduction.
At this point, no one, not even the policymakers on the
rate-setting Federal Open Market Committee, knows how either
inflation or financial stability will look over the next three
months.
Most scenarios are somewhat pessimistic, involving some
combination of persistent inflation, rising interest rates,
tightening credit conditions and/or slowing business activity.
Most of these outcomes would be at least mildly negative for
petroleum consumption, which explains why benchmark oil prices
have fallen since SVB’s failure.
But the fall in prices so far has been relatively modest,
taking them towards the bottom of last year's range, but not yet
below it.
Limited price falls reflect the considerable uncertainty
about whether the fallout from SVB’s failure will be contained.
More broadly, they reflect enormous uncertainty about
whether inflation is already returning to the target on its own,
or whether a credit crunch and/or higher interest rates will be
needed to get it there.
Until some of those uncertainties are resolved, oil prices
are likely to remain under mild but not severe pressure,
remaining basically within the range in which they have been
trading since the end of November 2022.
Related columns:
- U.S. bank failure places oil prices under pressure (March
13, 2023)
- Oil market has fully absorbed impact of Russia's invasion
of Ukraine (March 9, 2023)
- Soft landing for global economy remains a long shot
(February 28, 2023)
John Kemp is a Reuters market analyst. The views expressed
are his own
(Editing By Tomasz Janowski)
