The Continuing Threat of High Inflation Isn’t Over Yet

Despite good news in April, a rocky first quarter means rate cuts could be delayed until this fall.

Like the monster at the end of a horror movie, the threat of inflation is proving harder to kill than many had hoped.

US consumer inflation hit 3.4% in April, down from 3.5% on an annual basis in March. That’s still above the 3.2% recorded in February and the 3.1% in January, as measured by the Consumer Price Index. 

Though April’s results were an improvement, it could still be months — possibly as late as this fall — before the US Federal Reserve decides to cut interest rates. Investors had hoped that 2024 might see multiple rate cuts, which would lower the cost of capital.

Federal Reserve Chairman Jerome Powell says that policymakers will postpone rate cuts until annual inflation moves closer to the Fed’s 2% target. 

As Powell said after the Fed’s May meeting:

We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. 

So far this year, the data have not given us that greater confidence. In particular, and as I noted earlier, readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate for as long as appropriate. 

Many other developed regions have continued making progress toward lower inflation: 

• For example, the euro zone’s annual inflation steadily dropped from 2.9% last December to 2.4% in April. 
• Meanwhile, the United Kingdom has seen its annual inflation rate decline to 3.2% in March from 3.4% in February, slightly higher than what was expected. As a result, the Bank of England might delay rate cuts.  
• And India’s retail inflation hit a five-month low of 4.85% in April, within the country’s target of 2% to 6%. 
  

Survey: Inflation is the most-feared business threat in 2024

Going into 2024, business leaders were already concerned about the threat of inflation’s potential to negatively impact growth this year. 

It was the most cited concern by business leaders in C2FO’s 2024 Working Capital Survey, which asked more than 1,000 respondents about their outlook for the coming year. The survey was conducted in January 2024. 

About 60% of respondents said they expected a negative impact from inflation pressures on their businesses — more than the number of people worried about a potential recession, lack of workers and other threats. 

The 60% is actually an improvement over last year. About 72% of survey respondents said inflation pressures had a negative impact on their businesses in 2023, again leading the field of threats.

Among this year’s respondents who listed inflation as a concern, 54% said they would raise prices in response, the most popular strategy for adapting to economic conditions, while 30% said they would avoid raising workers’ pay.

What’s next for inflation trends? 

It’s entirely possible that the first quarter represents a short-term reversal and that the US will continue moving toward lower inflation. 

After all, the US jobs report for April was cooler than previous months, with 175,000 positions created versus the 235,000 that were expected. Cooler job growth is usually associated with reduced inflation.  

Private-sector wage increases were a little weaker, too — 3.9% on an annual basis, the weakest since May 2021 — though still above the period from 2007 to 2020, when wages never grew faster than 3.6% yearly.

More importantly, US GDP grew by an annualized rate of only 1.6% during the first quarter of the year, lower than experts had forecasted. A group of Bloomberg-surveyed economists had expected something closer to 2.5%. 

One factor sustaining inflation has been consumer spending — supported, at first, by excess savings from the pandemic. But the Federal Reserve Bank of San Francisco reports that, according to its calculations, those funds were exhausted in March of this year. 

While the end of those savings could impact spending and thus inflation, the San Francisco Fed cautions that other factors, like strong employment and growth in household wealth, could help keep spending going. One theory is that high-income households may be spending enough to cover any drop from other income brackets.

If inflation continues to increase, is it possible the Federal Reserve will raise interest rates? In his May news conference, Powell said it was unlikely that a hike would be the Fed’s next move, but he didn’t totally rule out an increase if conditions don’t change. The good news is that April’s results should help the Fed to avoid any increases. 

The bottom line on the threat of inflation

US businesses can’t take it for granted that inflation will continue the steady downward trend that it followed last year. As a result, cuts in interest rates could take longer to arrive than expected, which means the cost of borrowing will remain elevated for the near future. 

To keep the cost of working capital low, more companies may need to explore other options that are less reliant on interest rates, like dynamic discounting and supplier finance. If you’re a supplier, learn more about how C2FO can help. 

Gain other insights from this year’s Working Capital Survey. Download your copy now.