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Why the Fed Can't Control Inflation Alone

Latest economic reports suggest that consumers have yet to slow down their spending, the Action Alerts Team writes.
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Among the many issues confronting investors these days, inflation remains a dominant concern. 

The Action Alerts Plus team looked closely at the results from March’s economic indicators.

First, inflation continues to rise in most major economies worldwide. In the EU, it has topped 7 percent; the same for the UK. Australia reports 3.5 percent, which is high relative to its typically stable rates. Canada reported a 5.7 percent rate in March.

And, of course, the United States reported March inflation around 8.5 percent.

“While the expectation for the March readings for both the CPI and PPI called for month-over-month increases, the ones that were reported [were] well above expectations," the AAP team wrote.  "Candidly, given what we saw in the commodity markets as a result of the Russia-Ukraine war we expected the consensus forecast might fall short of the actual data. Even stripping out food and gas prices, which both put in double-digit increases year-over-year in March, the core CPI reading was still up meaningfully year-over-year.”

The PPI, which measures industrial and producer-side inflation as opposed to the CPI’s consumer-side metric, climbed even higher to 11.2 percent.

Yet, while prices continue to rise, consumer activity has not slowed down. Quite the opposite:

“While the March Retail Sales figure came in a tad softer than expected on a month-over-month basis, when viewed through the year-over-year lens, which is our preferred way to examine the report, there were a number of positives to be had," the team wrote.

"Even though Gasoline Station retail sales soared 37% year-over-year in March and 36.7% for the March quarter, food service & drinking place retail sales soared 19.4% year-over-year in March (+26.6% for the March-quarter), grocery store sales rose 9.5% year-over-year (8.9% for the March quarter), and nonstore retail sales climbed 10.3% year-over-year for the March quarter.”

All of this poses two major challenges for economists and policymakers trying to get a handle on inflation:

First, consumers have not yet hit the limit of their buying power. With more people continuing to spend more money, this will continue to put inflationary pressure on the markets. Prices rise to meet market capacity and market demand, and right now there’s plenty of both.

Second, this doesn’t appear to be a problem centered around U.S. policy. Persistent inflation has emerged around the world, which suggests that the causes are also broadly shared. This makes addressing the issue even more difficult for policymakers, who have spent much of their energy focused on U.S.-based causes for what appears to be a broadly shared issue.

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