Inflation is Stubborn. Is the Federal Budget Deficit Making it Worse?

     A very critical question still looming in the economy is why consumer prices continue to grow, even after an effort by the Federal Reserve to raise interest rates. Some explanations economists give include quirks of the current economic moment, such as a delayed post-pandemic surge in cost of home and auto insurance. Others include structural issues such as the lack of affordable housing that has caused rent prices in big cities to skyrocket. Other economists, including top officials, say the federal government bore some of the blame because it continued to pump borrowed money into the economy in a time when we did not need a fiscal boost. The borrowing is a result of a federal budget deficit that was elevated by tax cuts and spending increases. 

    I.M.F. officials warned that the deficit was also increasing prices. A report earlier this month stated that performance was impressive, but it was fueled in part by a pace of borrowing that is out of line with long-term fiscal sustainability. I.M.F. said that U.S. fiscal policies added about half a percentage point to the national inflation rate and raised short-term risks to the disinflation process. Essentially the government was working at cross-purposes with the Fed. Biden administration officials have sided against the I.M.F. but have been careful not to comment directly on the central bank's interest rate decisions instead just simply saying that their fiscal stance is not fighting the Fed. 

    The deficit is now larger, as a share of the economy than is historically normal for this point in an economic recovery, especially when employment is low and economic growth remains strong. This high deficit could affect inflation in numerous ways. It could increase demand for goods or services that remain in short supply, which drives up prices. It could also affect consumers' views about how much inflation they expect in the future and chip away at the effectiveness of Fed rate increases to slow growth. 

New York Times Article

Scotland's first minister may stepdown after power-sharing deal falls through

Scotland is dealing with a few issues regarding First Minister Humza Yousaf. Yousaf has been having issues with recent dissolutions of power sharing deals with Scottish Greens. These challenges have put immense strain upon the Minister, causing his consideration for resignation due to his unlikely and eventual loss of support from the Scottish Greens. The unprompted end to the power deal caused the strain within the Greens and is now causing a likely 2 ‘no confidence’ votes motioned after the ending of the deal. He is now awaiting unlikely support from the Greens and one vote from an opposition member in support, however unlikely they may come. He complicated his situation even more by now with knowledge of the ability to keep the deal in place, but his refusal to form an alliance with the Alba party.

Source : https://www.bbc.com/news/articles/c72p91kznz8o

Key Inflation Measure Rose 2.8% in March From a Year Ago

 Inflation did not slow in March, with core personal consumption expenditures price index excluding food and energy being up 2.8% from a year ago. This is the same figure that was seen in February and is higher than the 2.7% estimate given by Dow Jones. Both PCE and core PCE increased 0.3% equaling the increase from February. Markets did not show a reaction to this as Wall Street opened higher and the probability of two rates cuts being seen this year increased to 44% according to the CME Group's FedWatch gauge. 

Consumers increased personal spending by 0.8% on the month and the personal savings rate fell to 3.2% which is 2% lower than last year. This indicates households are saving less to keep up with their level of expenditure. It is believed with these reports that the Fed will hold interest rates high at least through the summer unless there are significant changes. 

Source - https://www.cnbc.com/2024/04/26/pce-inflation-march-2024-key-fed-inflation-measure-rose-2point8percent.html

Challenges increase for international students as unemployment rises in Canada

              In recent years, Canada has become one of the preferred destinations for international students seeking quality education and promising career opportunities. However, a tightening job market, primarily due to rapid job growth and immigration, has posed significant challenges to these students as most of them work part-time to support themselves while studying. With over 1 million foreign students in Canada, the competition for part-time jobs has increased. Furthermore, due to the increased cost of living in cities like Vancouver, international students have been struggling quite a bit. Canada's unemployment rate increased to 6.1 percent in March, with youth unemployment double the natural average. As a result, the government recently decided to place a cap on the number of foreign students admitted to universities in Canada to ease financial strain for residents. However, this has raised concerns about access to education for international students.

Link: https://www.voanews.com/a/rising-unemployment-hits-canada-s-international-students-especially-hard/7585796.html

India seen overtaking Japan in nominal GDP in 2025

According to recent estimates by the International Monetary Fund (IMF), India is projected to surpass Japan in nominal gross domestic product (GDP) in dollar terms by 2025. The IMF forecasts India's GDP to reach $4.34 trillion, slightly higher than Japan's projected $4.31 trillion. This shift is happening a year earlier than previously anticipated, largely due to the continued depreciation of the yen.

Japan's economy has been steadily slipping in global rankings. In 2023, it was surpassed by Germany, falling to the fourth-largest economy in the world. Factors contributing to India's rise include not only the weakened yen but also its robust economic growth, which outpaces Japan's. India's economy expanded by 7.8% in 2023, far surpassing Japan's 1.9% growth.

The key drivers of India's economic growth include its massive domestic demand, fueled by its population overtaking China's to become the world's largest in 2023. Additionally, India is attracting investment from advanced economies, while investment in China is slowing.

Experts attribute Japan's sluggish growth to government and central bank policies aimed at weakening the yen. They argue that relying on yen depreciation for economic growth has its limitations. Instead, there's a need to focus on boosting productivity through energy-saving initiatives and encouraging investment.

German Consumer Confidence Reaches Two-Year High

 German consumer confidence has reached its highest level since May 2022, indicating a possible economic upturn. The GfK's consumer-climate index predicts a continued rise in consumer confidence for May 2024. This improvement is driven by increased income expectations and reduced inflation, enhancing household purchasing power. Additionally, the willingness to buy has grown, though there's also a greater inclination to save, reflecting some economic uncertainty. Despite this positive trend in consumer sentiment and business surveys, the overall economic recovery is still uncertain, with a modest growth forecast of 0.3% for 2024.

https://www.wsj.com/economy/central-banking/german-consumer-confidence-reaches-two-year-high-38e91927?mod=economy_feat1_central-banking_pos4

The U.S. Could See Another 1970's Stagflation Event

    With the recent release of the first quality GDP numbers for the year, it has now become a concern the the US economy could be slowing down. First Quarter numbers show that the economy grew at an annualized rate of 1.6%, compared to the 3.4% growth the economy saw in the Forth Quarter of the year prior. While this has been a known condition from the Fed, the concern happens when we include inflationary data. The data suggest that the US economy is moving further and further away from our target inflation rate, which is 2%. Slowing GDP growth rate mixed with increasing inflation rate is a certain economic condition which is feared by investors and the government. Its called stagflation. According to JPMC CEO, Jamie Dimon, global and economic conditions are looking similar to the U.S. economy's last major period of stagflation, which was in the 70's  when oil prices rose dramatically. With all the concern, the good news is the the United State's inflation rate and economic growth is in a better position than similar market economies such as the UK and Germany. Our recent GDP growth numbers are also going to be reviewed and finalized twice which way create a better story, as our economic slow down can be less severe than we think or not a concern at all.

Source: https://www.cnn.com/2024/04/25/economy/stagflation-us-economy-gdp/index.html

  

Even if the Fed Cuts, the Days of Ultralow Rates Are Over

    This article discusses how the economy's response to the current interest rate climate may mean the neutral rate is higher than previously believed. The neutral rate is the rate that keeps the demand and supply of savings in equilibrium. This neutral rate is where economists expect rates to settle in the long run. Five years ago, the Fed raised the benchmark federal funds rate to 2.4%, implying the neutral rate was at that level, or lower.  

    The economy has handled the current rate hikes "exceptionally well" according to Joe Davis, chief global economist at Vanguard. He states, "Our conviction in a higher neutral rate is going up as every quarter of data comes in." If growth continues to be solid and inflation is stubborn the case for a rising neutral rate will strengthen. Consequently, the Fed may have less reason to cut rates. 

    However, some figures remain skeptical that the neutral rate is rising. Some believe the economy's resilience means the market is not sensitive to interest rates right now. Jerome Powell states the economy's response to current rates could be explained by "idiosyncrasies of the pandemic." Last month he commented "It's not that the policy isn't restrictive and it's not responsive to rates. It's that we had this outside force temporarily affecting that." Further data will inform economists on the progression of the neutral rate.  

https://www.wsj.com/economy/central-banking/why-high-interest-rates-could-be-here-for-the-long-run-c6670448?mod=hp_lead_pos1