Preliminary data points to inflation heading into the first three months of 2024, and the news so far is not good.

Pick your poison. Whether it’s prices at the register or wholesale input prices, while inflation is far from accelerating in 2022, it doesn’t look like it’s going away anytime soon. Future expectations are also increasing.

Investors, consumers and policymakers – even economists – have become wary of price pressures starting in 2024. Stocks fell on Friday as the Dow Jones Industrial Average shed nearly 500 points, down 2.4 percent for the week and nearly surrendered. All its benefits for the year.

“Fool me once, shame on you,” Harvard economist Jason Furman told CNBC this week. Now is the time to change the way we think about things going forward.”

There is no doubt that the market has been forced to change its thinking dramatically.

Even import prices, an otherwise minor data point, contributed to the narrative. In March, it posted its biggest three-month gain in nearly two years. All of this has become a major headache for the markets, which sold off for most of the week before really hitting the skids on Friday.

As if all the bad inflation news wasn’t enough, a Wall Street Journal report on Friday indicated that Iran plans to attack Israel in the next two days, adding to the turmoil. Energy prices, which have been a key factor in inflation readings for the past two months, rose on signs of further geopolitical turmoil.

“You can take your pick. There are a lot of catalysts for a Friday selloff,” said market veteran Jim Paulson, a former strategist and economist with Wells Fargo and other firms who is now Paulson for Substack. Writes a blog titled Perspectives. “More than anything else, it really depends on one thing now, and if it’s going to happen, it’s an Israel-Iran war. … It gives you a tremendous sense of instability.”

By contrast, going into the year markets had a dovish Fed cutting interest rates early and often — six or seven times, with the kick-off in March. But with stubborn data each month, investors have had to recalibrate, now expecting just two cuts, according to futures markets pricing a non-zero chance of no cuts this year (about 9%). It is visible.

“I would love for the Fed to be in a position to cut rates later this year,” said Furman, who served as chairman of the Council of Economic Advisers under former President Barack Obama. “But the data is not close to being there, at least not yet.”

This week was full of bad economic news, with each day bringing another dose of reality about inflation.

It started on Monday with the New York Fed consumer survey showing expectations for a rent increase next year rose dramatically, to 8.7 percent, or 2.6 percentage points higher than in the February survey. Costs of food, gas, medical care and education have also increased.

On Tuesday, the National Federation of Independent Business showed that optimism among its members fell to an 11-year low, with members citing inflation as their top concern.

Consumer prices rose more than expected on Wednesday to show a 12-month inflation rate of 3.5 percent, while the Labor Department reported on Thursday that wholesale prices posted their biggest one-year gain since April 2023. What did

Finally, a report on Friday indicated that import prices rose more than expected in March and posted the biggest three-month advance since May 2022. and business. And a closely watched survey of consumer sentiment by the University of Michigan came in lower than expected, with respondents also upping their inflation outlook.

Fed officials took note of the higher readings but did not sound panic alarms, as most said they expected cuts later this year as well.

“The economy has come a long way toward achieving better balance and reaching its 2 percent inflation target,” New York Fed President John Williams said. “But we have not yet seen full alignment of our dual mandate.”

Boston Fed President Susan Collins said she sees inflation returning “steadily, if unevenly” to 2 percent, but noted that it will take “more time than I previously thought” for that to happen. It may take time.” Minutes from the March Fed meeting released on Wednesday showed that officials are concerned about high inflation and are looking for more convincing evidence that it is on a stable path.

While the consumer and producer price indexes grabbed the market’s attention this week, it’s worth remembering that the Fed’s focus is elsewhere when it comes to inflation. Policymakers instead follow the personal consumption expenditure price index, which has not yet been released for March.

There are two main differences between CPI and PCE index. Basically, the Commerce Department’s PCE adjusts for changes in consumer behavior, so if price changes are causing people to substitute chicken for beef, it will show up more in the PCE than in the CPI. . In addition, PCE underweights housing costs, an important consideration with rents and other shelter costs high.

In February, the PCE reading was 2.5% for all items and 2.8% ex-food and energy, or the “core” reading that Fed officials watch more closely. The next release won’t come until April 26. Citigroup economists said current tracking data points to a reduction in core inflation to 2.7 percent, better but still far from the Fed’s target.

Moreover, there are many other signals indicating that the Fed has a long way to go.

The so-called sticky price CPI, as calculated by the Atlanta Fed, rose to 4.5 percent on a 12-month basis in March, while the flexible CPI rose a full percentage point, though to just 0.8 percent. Fixed-price CPI includes items such as housing, motor vehicle insurance and medical care services, while flexible-price focuses on food, energy and vehicle prices.

Finally, the Dallas Fed trimmed mean PCE, to 3.1 percent in February, throwing off the extreme reading on either side — again a way short of the central bank’s target.

One bright spot for the Fed is that the economy has been able to withstand higher rates, which have had little impact on the employment picture or growth at the macro level. However, there are fears that such conditions will not last forever, and there are signs of cracks in the labor market.

“I’ve long worried that the last round of inflation will be the hardest,” said Harvard economist Furman. “If so, you’d need a decent amount of unemployment to get inflation to 2.0%.” “

That’s why Furman and others have urged the Fed to reconsider its commitment to 2% inflation. For example, BlackRock CEO Larry Fink told CNBC on Friday that if the Fed can get inflation closer to 2.8%-3%, he should “call it another day.”

“At the very least, I think it would be fine to get to 2 percent inflation — two to 2.49 rounds. If it stabilizes there, I don’t think anybody’s going to notice,” Furman said. . “I don’t think they can afford the risk of inflation above 3, and that’s the risk we’re facing right now.”