QUESTIONS:

1. (5 pt.) Explain why the market for WTI crude oil can be viewed as a "perfectly competitive market." How is the price of crude oil determined? Are there a large number of buyers and sellers? Do individual firms buying or selling crude oil have the power to set price? Is this a standardized Is this product? Is there "free entry or exit" in this market? Are there any 1000-pound gorillas in this market that have the ability influence the price of crude oil?
2. (2,5 pt.)Has there been an increase or decrease in demand? Remember that some of the factors that could shift the demand curve include changes in preferences, income, the price of substitutes or complements, or a change in the number of consumers in the market. Explain your reasoning carefully.
3. (2.5 pt.)Has there been an increase or decrease in supply? Remember that some of the factors that could shift the supply curve include changes in the costs of materials, wages, or other inputs, changes in technology or the number of firms in the market. Explain your reasoning carefully.
4. (10 pt.)Draw a supply and demand graph to illustrate the changes described above. Be sure to label your graph and clearly indicate which curve(s) shifts and what happens in your diagram to the equilibrium price and quantity. What is the current price of crude oil? Explain the main factors contributing to the recent increase in oil prices. Thenforecast the price of crude oil at the end of this year. in order to solve it you would need to explain which of the demand and supply shifters are likely to change over the next few months. Show your forecast in your supply-demand graph of the WTI oil market. What types of financial investment could you make to profit from your economic analysis?
5. (20 pt.)In the context of your S-D crude oil model analyze (explain in words) the impact of the following changes in economic conditions (ceteribus paribus) on the equilibrium price and quantity of oil. Show your result in a supply-demand graph (separate graph for each change) of the U. S. oil market.
6. economic growth continues which increases household disposable income.
7. the price of natural gas (methane) and electricity decrease.
8. non-OPEC oil production increases due to improved drilling technology.
9. tariffs on steel increase the costs of drilling and producing crude oil.
10. Saudi Arabia and Russia agree to reduced oil production.
11. (10 pt.) Draw a hypothetical supply-demand graph for the apartment rental market in San Francisco. In your graph what is the equilibrium price and quantity of apartments? Show the impact of a binding price ceiling that San Francisco puts on rental properties. At the price ceiling what is the quantity demanded? What is the quantity supplied? Explain why rent controls typically result in economic inefficiency?
12. (17 pt.)Why Do Prices Keep Going Up and What's the Cause of Inflation...

What is meant by the term inflation? How is inflation measured in the U. S. economy? What is the Federal Reserve Bank's (FED) target for inflation? What was the percentage increase in consumer price index (CPI) between February 2023 and February 2024? This past week CPI data and PPI data for Feb. 2024 showed an upward spike in prices. On an annualized basis how high was inflation in February as measured by the CPI and PPI? Give at least four reasons why prices keep going up. Explain your reasoning. What do you expect the inflation rate to be at the end of 2024? Explain. In view of this recent inflation data when do you expect the Federal Reserve Bank to begin lowering interest rates? Explain.

8. (17 pt.) Hiring Boom Continues ...Howmany jobs were added in the U.S. economy between February 2023 and February 2024? How many jobs were added in February 2024? Why has it been difficult for firms to fill job openings? How many job openings are there for each unemployed worker? How fast have nominal wages increased over the past year? After adjusting for inflation calculate the change in real wages over the past year. What is the BLS formula for calculating the unemployment rate? Why did the unemployment rate increase in February despite robust job growth? Explain.

9.(16 pt.) Define what is meant by the terms Real GDP and Nominal (current dollar) GDP? What was the rate of growth in real GDP in 2023? What was the rate of growth in real GDP (annualized) in the 4^th quarter of 2023? Why is nominal GDP increasing much faster than real GDP? Is the US economy currently in a recession? Will the U.S. economy enter a recession in 2024? Explain. Is consumer spending increasing or decreasing? Explain. Does it make sense that firms like General Mills and Campbells Soup are currently reporting increases in sales and profits but a decrease in the quantity of good sold? Explain.

News Release

EMBARGOED UNTIL RELEASE AT 8:30 a.m. EST, Wednesday, February 28, 2024

BEA 24-05

Gross Domestic Product, Fourth Quarter and Year 2023 (Second Estimate)

Real gross domestic product(GDP) increased at an annual rate of 3.2 percent in the fourth quarter of 2023 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.9 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 3.3 percent. The update primarily reflected a downward revision to private inventory investment that was partly offset by upward revisions to state and local government spending and consumer spending (refer to "Updates to GDP").

The increase inreal GDPreflected increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, and residential fixed investment that were partly offset by a decrease in private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

Compared to the third quarter of 2023, the deceleration inreal GDPin the fourth quarter primarily reflected a downturn in private inventory investment and slowdowns in federal government spending, residential fixed investment, and consumer spending. Imports decelerated.

Currentdollar GDPincreased 4.9 percent at an annual rate, or $334.5 billion, in the fourth quarter to a level of $27.94 trillion, an upward revision of $5.8 billion from the previous estimate (tables 1 and 3). More information on the source data that underlie the estimates is available in the "Key Source Data and Assumptions" file on BEA's website.

Theprice index for gross domestic purchasesincreased 1.9 percent in the fourth quarter, the same as in the previous estimate. Thepersonal consumption expenditures (PCE) price indexincreased 1.8 percent, an upward revision of 0.1 percentage point. Excluding food and energy prices, the PCE price index increased 2.1 percent, an upward revision of 0.1 percentage point.

Personal Income

Current-dollar personal incomeincreased $219.5 billion in the fourth quarter, a downward revision of $5.4 billion from the previous estimate. The increase primarily reflected increases in compensation, personal income receipts on assets, and proprietors' income that were partly offset by a decrease in personal current transfer receipts (table 8).

Disposable personal incomeincreased $202.5 billion, or 4.0 percent, in the fourth quarter, a downward revision of $9.2 billion from the previous estimate.Real disposable personal incomeincreased 2.2 percent, a downward revision of 0.3 percentage point.

Personal savingwas $809.2 billion in the fourth quarter, a downward revision of $22.4 billion from the previous estimate. Thepersonal saving ratepersonal saving as a percentage of disposable personal incomewas 3.9 percent in the fourth quarter, a downward revision of 0.1 percentage point.

Updates to GDP

With the second estimate, downward revisions to private inventory investment and federal government spending were partly offset by upward revisions to state and local government spending, consumer spending, residential fixed investment, nonresidential fixed investment, and exports. Imports were revised up. For more information, refer to theTechnical Note. For information on updates to GDP, refer to the "Additional Information" section that follows.

Updates to Third-Quarter Wages and Salaries

In addition to presenting updated estimates for the fourth quarter, today's release presents revised estimates of third-quarter wages and salaries, personal taxes, and contributions for government social insurance, based on updated data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages program. Wages and salaries are now estimated to have increased $184.2 billion in the third quarter, an upward revision of $23.0 billion. Personal current taxes are now estimated to have increased $61.5 billion, an upward revision of $8.9 billion. Contributions for government social insurance are now estimated to have increased $23.2 billion, an upward revision of $3.0 billion. With the incorporation of these new data, real gross domestic income is now estimated to have increased 1.9 percent in the third quarter, an upward revision of 0.4 percentage point from the previously published estimate.

GDP for 2023

Real GDPincreased 2.5 percent in 2023 (from the 2022 annual level to the 2023 annual level), compared with an increase of 1.9 percent in 2022 (table 1). The increase in real GDP in 2023 primarily reflected increases in consumer spending, nonresidential fixed investment, state and local government spending, exports, and federal government spending that were partly offset by decreases in residential fixed investment and private inventory investment. Imports decreased (table 2).

Current-dollar GDPincreased 6.3 percent, or $1.61 trillion, in 2023 to a level of $27.36 trillion, compared with an increase of 9.1 percent, or $2.15 trillion, in 2022 (tables 1 and 3).

Theprice index for gross domestic purchasesincreased 3.4 percent in 2023, compared with an increase of 6.8 percent in 2022 (table 4). ThePCE price indexincreased 3.7 percent, compared with an increase of 6.5 percent. Excluding food and energy prices, the PCE price index increased 4.1 percent, compared with an increase of 5.2 percent.

Measured from the fourth quarter of 2022 to the fourth quarter of 2023, real GDP increased 3.1 percent during the period (table 5), compared with an increase of 0.7 percent from the fourth quarter of 2021 to the fourth quarter of 2022.

The price index for gross domestic purchases, as measured from the fourth quarter of 2022 to the fourth quarter of 2023, increased 2.4 percent, compared with an increase of 6.2 percent from the fourth quarter of 2021 to the fourth quarter of 2022. The PCE price index increased 2.8 percent, compared with an increase of 5.9 percent from the fourth quarter of 2021 to the fourth quarter of 2022. Excluding food and energy, the PCE price index increased 3.2 percent, compared with an increase of 5.1 percent.

* * *

Next release, March 28, 2024, at 8:30 a.m. EDT Gross Domestic Product (Third Estimate) Corporate Profits Gross Domestic Product by Industry Fourth Quarter 2023 and Year 2023

Hiring Boom Continues, but Signs of a Cooling Labor Market Boost Rate-Cut HopesUnemployment ticked higher to 3.9% and wage growth slowed, despite a blockbuster hiring number

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David Uberti

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Updated March 8, 2024 4:24 pm ET

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The U.S. added 275,000 jobs in February but wage gains slowed, signaling that the economy remains robust as inflation edges lower. Photo: Spencer Platt/Getty Images

Steady hiring and cooling wage growth last month offered the latest evidence that the U.S. economy is making progress toward a so-called soft landing that brings inflation down without a recession.

U.S. employers added 275,000 jobs in February, according to the Labor Department, a blockbuster number that far exceeded the 198,000 that economists had expected.

But behind the headline number were signs of a gradual slowdown. The unemployment rate ticked up to 3.9%, which was higher than expected, andwage growth slowed. Gangbusters data from January were revised sharply lower.

The Goldilocks report lends credence to the Federal Reserve's outlook that somewhatlower interest ratescould be warranted later this year, potentially providing a boost to markets that have been on a tear to start 2024.

Bill Adams, chief economist at

Comerica Bank

, summed up Friday's report with one word: cool. "That's what the Fed wants to see right now," he said.

Stocks rose following the report, but finished the day in the red, thwarting the S&P 500's attempt at its 17th record high of the year.

Treasury yields, which fall as prices rise, held on to their recent declines, a sign that investors believe rate cuts could be on tap in the coming months.

The Labor Department on Friday made substantial revisions to previous employment data. Officials said a month ago that the economy had added353,000 positionsin January. On Friday, they said the number was actually 229,000.

Average hourly earnings in February rose just 0.1% from the previous month, below Wall Street's expected 0.2%. That was alsoa significant slowingfrom a revised 0.5% in January.

A month ago, those red-hot January numbers drew warnings from economists and investors that price pressures were rebounding. But Friday's mixed report, which smoothed out weather-related abnormalities in that earlier data, allayed those fears.

Job seekers have encountered a market in which hiring has exceeded economists' expectations.PHOTO:ERIC THAYER/BLOOMBERG NEWS

Investors in recent weeks have grown increasingly confident in the U.S. economy, which has muscled through the highest interest rates in 20-plus years with consistent job growth and some of the lowest unemployment rates in a half-century.

President Biden trumpeted those gains inhis State of the Union addresson Thursday, pointing to investments spanning renewable energy and manufacturing. "The landing is and will be soft," he said.

The key question that will ripple from the U.S. economy into financial markets going forward is one of timing.

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Should the Fed keep rates too high for too long, it could stifle economic growth and risk a recession. But cutting too early could help reignite inflation by lowering borrowing costs for businesses making capital improvements, as well as consumers buying new homes or cars.

Fed ChairJerome Powellpreviously poured cold water on the idea of a rate cut at the central bank's March 19-20 meeting. Investors are assigning a better-than-50% chance of a rate cut in June, according to interest-rate futures.

In hearings on Capitol Hill this week,Powell told lawmakersthat the Fed is seeking greater certainty that inflation is sliding closer toward the central bank's 2% target before it begins easing monetary policy.

Russian Oil Output Shrinks Under Western Pressure

An EU oil embargo could drive down Russian supply by 3 million barrels a day, according to International Energy Agency

Russia's oil industry faces a heavy hit if the European Union implements plans to stop buying its exports.

PHOTO:NATALIA KOLESNIKOVA/AGENCE FRANCE-PRESSE/GETTY IMAGES

By

Matthew DaltonFollow

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Will HornerFollow

Updated May 12, 2022 12:35 pm ET

PARISWestern pressure on Russia over theinvasion of Ukrainelowered the country's crude-oil output by 9% in April and reshaped the global oil market as Russia sought new buyers for its production outside the West, the International Energy Agency said.

Russia's lost supplies amounted to 900,000 barrels a day in April and are expected to grow by a further 600,000 barrels a day this monthtotaling around 1.5% of the world's oil output when the invasion began. Anoil embargobeing considered by the European Union, the biggest destination for Russian crude, would likely push those losses to as much as 3 million barrels a day from July, bringing Russian oil production to its lowest level in nearly two decades, the IEA said in its monthly report Thursday.

The West's response to the Russian invasion has scrambled the global oil market and hit Russia hard.European energy buyers have turned awayfrom Russian diesel and other refined products, forcing Russian refineries to cut output and slash purchases of crude oil, the IEA said. India and Turkey have stepped in to become big buyers of Russian crude, allowing Russian exports to hold steady this year. But that hasn't been enough to offset the drop in Russian domestic demand for crude oil and the end of exports to the U.S. and the U.K., which have both imposed sanctions on Russian oil.

The EU has slashed its purchases of Russian crude oil and petroleum products by around 15% since before the invasion, according to the IEA. The bloc has been wary of sanctioning Russian oil because of its deep dependence on Russian energy supplies.Hungary opposes an oil-sanctions planunder discussion within the bloc because it and other Eastern European nations import most of their crude oil via a Soviet-era pipeline linked to Russia.

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While the IEA still expects a sizable drop in Russian oil output, its forecasts for lost Russian oil production have narrowed. The IEA hadin a previous reportsaid it expected the amount to reach 3 million barrels a day by the current month. Now it expects that amount will be reached in July.

Russian oil exports rebounded in April, after dropping in the previous month as the first Western sanctions took effect, the IEA said. Russia's oil exports rose by 620,000 barrels a day to 8.1 million barrels a day, close to its prewar levels. While oil shipments to the EU, U.S. and U.K. fell by around 1.2 million barrels a day, cargoes bound for India and Turkey jumped by 730,000 barrels a day and 180,000 barrels a day, respectively.

"They have been far more effective than many of us thought they would be. They have been able to find these one-off deals with tanker companies that are still willing to operate with them," said Rebecca Babin, a senior energy trader at CIBC Private Wealth.

Still, the threat of new measures and sanctions on Russia's state-alignedRosneft OilCo.due to take effect on May 15 means a bleak outlook for Russian oil exports, she said. "I think this is not a story that gets better for Russia. It is going to get worse."

Europe's decision to cut purchases of Russian petroleum products poses a bigger challenge for the country's oil industry, said Toril Bosoni, head of the IEA's oil markets division. Diesel and other refined products typically aren't shipped long distances, unlike crude oil, which is often moved halfway around the world in tankers.

"The Russians are struggling to find buyers for the products," Ms. Bosoni said. "They're refining a lot less at home and domestic demand is also lower."

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The consequences of harsh economic sanctions against Russia are already being felt across the globe. WSJ's Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict might transform the global economy. Photo Illustration: Alexander Hotz

Russia's flagging output, coupled with constrained supply from members of the Organization of the Petroleum Exporting Countries, is keeping the oil market in a narrow deficit, a dynamic that analysts expect will keep energy prices high and add to strain on the global economy.

The IEA cut its forecasts for global oil supply this year by 100,000 barrels a day to 99.2 million barrels a day. Total demand for oil is forecast to reach 99.4 million barrels.

Still, lost supplies from Russia are being partly balanced by waning demand. Covid-19 outbreaks in China andBeijing's strict lockdownshave reduced the global appetite for crude. Signs of flagging economic growth are also expected to reduce demand for oil.

The IEA expects oil demand to grow by 1.9 million barrels a day and 1.2 million barrels a day in the second and third quarters of the year, respectively. That is 200,000 barrels a day less in each quarter than it forecast last month. In the fourth quarter, the IEA expects demand for oil to contract by 200,000 barrels a day.

A key question for the rest of the year is whether Russia's oil industry can continue to produce as before without technical support from the major Western oil companies that have largely pulled out of the country. Western nations have also forbidden the sale of energy-industry equipment to Russia, pressuring the country's aging energy infrastructure.

"We don't think it's going to have an immediate impact on supply," Ms. Bosoni said. "Russians have a lot of the technology and know-how."

Separately Thursday, OPEC cut its forecasts for oil demand for the second month running. The cartel said it expects demand for crude of 100.2 million barrels a day this year. That is 210,000 barrels a day less than it was expecting last month.

The group, which counts Russia as an ally, has slashed almost 800,000 barrels a day from its demand-growth forecasts since the war in Ukraine broke out.

OPEC said Russian oil output this year would be roughly 10.9 million barrels a day, a more optimistic reading than the IEA's, but still 350,000 barrels a day less than it was forecasting in April.

Earlier this month, OPEC and a group of allied nations including Russia agreed to increase oil output by roughly 430,000 barrels a dayin line with what the group, collectively known as OPEC+, had already agreed to.

OPEC delegates said the IEA's conclusions that Russian production is sharply declining wouldn't prompt an immediate change in course from the cartel because Moscow's exports remain resilient and the agency itself has concluded markets can weather oil sanctions on the Kremlin. OPEC+ has an agreement to continue slowly undo production cuts throughout 2022, a decision confirmed earlier this month.

Russian seaborne exports rose by 490,000 barrels a day to 3.9 million barrels a day in April thanks to a jump in India shipments, according to commodity data-intelligence firm Kpler. With the hefty discounts of up to $40 a barrel a day to international prices, Russia "may just be focusing on maximizing volumes to prove a point that the sanctions have failed," said an OPEC delegate.

Benoit Faucon in London contributed to this article.

1. ENERGY & OIL

OPEC Holds Oil Demand View Steady, Raises 2024 Economic Forecast

By

Giulia Petroni

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March 12, 2024 8:36 am ET

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The Organization of the Petroleum Exporting Countries left its estimates for global oil-demand growth unchanged, but raised its economic forecast for this year further amid falling inflation and anticipated interest-rate cuts.

In its monthly report, the Vienna-based cartel said it continues to expect oil demand to grow by 2.2 million barrels a day this year and by 1.8 million barrels a day in 2025, unchanged from its previous estimates.

The group raised its global economic-growth forecast for this year to 2.8% from 2.7% previously, supported by strong growth dynamics in China, India, and the U.S. The economic-growth forecast for next year was left unchanged at 2.9%.

"The anticipation of a positive, steady dynamic across major economies is supported by expectations for a continued easing in general inflation throughout 2024 and into 2025," OPEC said on Tuesday. "This is anticipated to lead to an increase in real income levels and improved consumer spending ability."

Meanwhile, central banks are expected to start cutting interest rates from the second half of the year throughout 2025, according to the cartel.

OPEC raised U.S. economic-growth estimates for this year to 1.9% from 1.6% previously and kept them at 1.7% for 2025. The eurozone growth forecast remains unchanged at 0.5% this year and 1.2% the next.

The cartel's latest report comes as crude futures continue to trade a tight trading range amid conflicting market forces, with concerns over slowing Chinese demand and the path of U.S. interest-rate cuts capping gains sparked by signs of tightness in the physical markets, OPEC+'s extensions of output curbs and geopolitical risks in the Middle East.

Brent crude, the international benchmark, currently trades around $82 a barrel, while WTI, the U.S. oil gauge, is at around $78 a barrel.

Despite continuing cuts by Saudi Arabia and other members, OPEC produced more crude oil in February on higher output from Libya and Nigeria. Overall, the cartel's crude-oil production rose by 203,000 barrels a day to 26.57 million barrels a day compared with January levels, it said, citing secondary sources.

Oil production from Libya increased by 144,000 barrels a day to 1.17 million barrels a day, while Nigeria's production rose by 47,000 barrels a day to 1.48 million barrels a day. Saudi oil production rose by 18,000 barrels a day to 8.98 million barrels a day.

OPEC and its allies this month agreed to extend voluntary output cuts of around 2.2 million barrels a day into the second quarter of the year in an effort to avert global surplus and support prices, and are expected to decide on policy for the second half at a ministerial meeting in June.

The group cut its non-OPEC supply growth forecast to 1.1 million barrels a day for 2024 from 1.2 million barrels a day previously, saying the largest declines in supply growth are expected in Russia and Mexico. Growth expectations for 2025 were instead raised to 1.4 million barrels a day from 1.3 million barrels a day in the previous month's forecast.

The International Energy Agency is due to release its monthly report on Thursday.

IEA Slightly Raises Oil-Demand Growth View But Cuts Supply ForecastOil-demand growth is now seen at 1.3 million barrels a day from a previous forecast of 1.2 million barrels a day, the Paris-based organization said

By

Giulia Petroni

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March 14, 2024 5:52 am ET

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The International Energy Agency lifted its forecast for oil-demand growth this year on an improved outlook in the U.S. and increased bunkering, while it cut estimates for global supply on lower output expectations from OPEC+.

Oil-demand growth is now seen at 1.3 million barrels a day from a previous forecast of 1.2 million barrels a day, the Paris-based organization said. Total demand is expected to average 103.2 million barrels a day from previously 103 million barrels a day.

The revision was attributed to surging ethane demand in the U.S. for the petrochemical sector and increased bunker fuel use due to trade flow disruptions caused by Houthi attacks on Red Sea shipping.

Still, the IEA confirmed demand growth is expected to decelerate significantly from last year's growth of 2.3 million barrels a day.

"The slowdown in growth means that oil consumption reverts towards its historical trend after several years of volatility from the post-pandemic rebound," it said on Thursday. "A weaker economic outlook further tempers oil use, as do efficiency improvements and surging electric vehicle sales."

The IEA's projection remains substantially lower than OPEC's, as the group of oil-producing countries reiterated this week that it sees global oil-demand growth of 2.2 million barrels a day this year and 1.8 million barrels a day the next.

Meanwhile, the global supply-growth forecast was cut to an average of 102.9 million barrels a day from 103.8 million barrels a day previously, the agency said, after OPEC+ output expectations were lowered by 920,000 barrels a day.

"Our balance for the year shifts from a surplus to a slight deficit," the IEA said. The agency previously said it expected a surplus assuming OPEC+ would start unwinding cuts from the second quarter of the year, but the group of oil-producing countries earlier this month decided to extend its voluntary curbs until June.

In the first quarter, global oil output is projected to fall by 870,000 barrels a day compared with the fourth quarter of 2023, due to weather-related constraints and OPEC+ output cuts. Non-OPEC production is set to dominate from the second quarter onward.

"The United States is set to lead the world's supply growth for a fourth year running," the IEA said. "Saudi Arabia, on the other hand, could post the world's largest decline for a second straight year if it continues to shoulder the bulk of the OPEC+ reduction."

Non-OPEC+ production rebounded by 270,000 barrels a day in February compared with the previous month, as operations in the U.S. and Canada partially recovered from an Arctic freeze. According to the IEA, non-OPEC+ supply is expected to rise by 1.6 million barrels a day this year compared with 2.4 million barrels a day in 2023.

Meanwhile, Russian crude exports fell by 140,000 barrels a day in February to 7.6 million barrels a day, with commercial revenue down 1% compared with the previous month to $15.7 billion.

The IEA's latest report came after crude futures rose on signs of healthy demand after the Energy Information Administration reported a large weekly draw in U.S. inventories and Ukraine intensified attacks against Russia's energy infrastructure, damaging some major refineries and raising fears around supply disruptions.

Oil prices have been trading in a narrow range in recent weeks as the market grapples with conflicting signals on supply and demand. OPEC+ extension of output cuts and geopolitical risks in the Middle East continue to underpin prices, but concerns over Chinese demand and the path of U.S. interest-rate cuts linger, capping price gains.

Brent crude, the international benchmark, currently trades around $84 a barrel, while WTI, the U.S. oil gauge, is around $80 a barrel.

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Appeared in the March 15, 2024, print edition as 'IEA View of Growth In Oil Demand Rises'

Inflation Picks Up to 3.2%, Slightly Hotter Than ExpectedA focus at the next Fed meeting will be whether most officials continue to expect three cuts this yearor fewer

By

Justin Lahart

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Updated March 12, 2024 4:26 pm ET

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Inflation continues to be the most important data point for the markets. The February CPI report sets up some tough decisions for the Federal Reserve for the rest of this year. WSJ's Dion Rabouin explains where it all stands. Photo: Jim Lo Scalzo/Shutterstock

U.S. inflation was slightly stronger than expected last month but did little to change expectations that the Federal Reserve will begin cutting rates later this year.

Consumer prices rose 3.2%in February from a year earlier, the Labor Department said Tuesday, up slightly from economists' expectations of 3.1%.

The second straight month of firmer-than-expected inflation is likely to reinforce the central bank'swait-and-see posturetoward rate reductions when officials meet next week. Still, officials are focused on when to cut ratesrather than whether to raise them again. Inflation has declined notably from 40-year highs following the most rapid rate increases in four decades.

Eric Rosengren, who headed the Boston Fed from 2007 to 2021, said the Labor Department's reading shouldn't fundamentally alter expectations for three rate cuts this year, as officials penciled in at their December meeting. Investors expect the first rate cut in June.

Tuesday's report "basically tells the story that there's a gradual improvement" in core inflation, Rosengren said in an interview. "As long as wages and salaries continue to drift down, I don't see this report really altering the overall view of probably a June reduction."

U.S. stocks have made broad gains this year, though trading has been choppy asinvestors speculateon exactly how the Fed might deliver its rate cuts. Stocks rose after the report, a sign that investors also think that a June rate cut hasn't been derailed. The S&P 500 snapped a two-day losing streak to hit a record close.

Still, the report didn't make the Fed's coming deliberations easier. Core prices, which exclude food and energy items in an effort to better track inflation's underlying trend, rose more than expected, both when measured from a year ago and a month ago.

Tuesday's report "is likely to instill less confidence at the Fed that inflation is fast approaching its 2% target," said Barclays U.S. economistPooja Sriram.

Many of the consumer prices collected for the CPI report are used in the Fed's preferred inflation gauge.PHOTO:RICHARD B. LEVINE/ZUMA PRESS

When Fed officials meet next week, a key focus will be whether most officials will continue to expect three cuts this year or whether more officials will pencil in just two cuts. The Fed has held its benchmark short-term interest rate around 5.3%, a 23-year high, since last July.

While the projections aren't the product of committee deliberations, they often take on importance in shaping public expectations during periods where the Fed isn't changing rates or significantly altering its policy statement, as is likely to be the case next week.

The Fed's goal for 2% inflation isn't based on the Labor Department's report released Tuesday, which is known as the consumer-price index, or CPI. Instead, the Fed's goal is measured against a separate gauge maintained by the Commerce Department. That measurement is known as the personal-consumption expenditures price index, or PCE, and ittends to run coolerthan the Labor Department's. In January it was up 2.4% from a year earlier. The February reading will be released March 29.

Rosengren said he would lean toward lowering interest rates at the Fed's meeting in early May because of signs the economy is cooling more than headline measures have indicated so far. But he said he thought Fed officials would wait until June to make their first rate cut to be more confident that inflation was returning to their 2% goal.

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Eric Rosengren, who led the Boston Fed from 2007 to 2021, said he would lean toward lowering rates in May.PHOTO:KEITH BEDFORD/REUTERS

"Would you change your PCE forecast for the end of the year based on this report? My answer would be no," he said.

The PCE index weighs certain items differently than the CPI. Based on how prices for goods and services in the CPI translate into the PCE index, economists at

said they expected core PCE prices last month rose 0.2% and 0.3%, respectively. That would be down from the January increase of 0.42%.

Inflation has cooled notably over the past year. In February 2023, inflation as measured by the CPI was 6%. But many Americans are taking little comfort from milder 12-month inflation rates because the run-up in the price of everything from cars to restaurant meals to housing since 2021 has been abnormally large.

Wages and prices, change from a year earlier Source: Labor Department Notes: Consumer-price data aren't seasonally adjusted; wage data are average earnings for all private workersand are seasonally adjusted.

Fed ChairJerome Powellhas signaled that inflation readings don't necessarily need to be better than the mildones recorded late last year for the central bank to begin lowering rates later this year. A big question will be to what degree the increases in the Labor Department's core prices this year represent setbacks.

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Powell and other officials have suggested the central bank isn't likely to raise interest rates further in response to modestly disappointing inflation data; instead, officials would simply hold rates at their current level for longer.

"If inflation seems more entrenched than we think it is, the first thing we would do is keep rates where they are for an extended period of time," said Minneapolis Fed PresidentNeel Kashkariin an interview last week.

• Bureau of Labor Statistics
• Economic News Release
• Producer Price Index

Economic News Release

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