Wholesale inflation accelerated in March, delivering a blow to the narrative that price pressures are easing and dimming hopes for an interest rate cut in the near future.
Besides representing an acceleration in annual terms from the prior month, the March reading of 2.1 percent is the highest since April 2023, when it came in at 2.3 percent.
The inflation index rose by 0.2 percent in month-over-month terms in March, lower than the 0.6 percent notched in the prior month but an increase in prices nonetheless.
Implication for Retail Inflation
The wholesale inflation measure tends to be a leading indicator of retail inflation because business input costs tend to get passed along to consumers. The most common measure of retail inflation is the consumer price index (CPI), which also shot up last month.
While inflation has fallen from the recent June 2022 peak of 9 percent, the latest data show that price pressures remain elevated, putting pressure on the Federal Reserve to maintain higher interest rates for longer—or even raise them further.
Currently, the federal funds rate is within a range of 5.25 percent to 5.50 percent, with markets expecting a single 25 basis-point rate cut by the end of the year.
Meanwhile, the “core” wholesale inflation reading for March was 2.4 percent, a sharp acceleration from the prior month’s 2 percent and an indication of persistent underlying inflationary pressures that are likely to trickle down to consumers.
Interest Rates Could Top 8 Percent
Mr. Dimon warned in his letter to shareholders that forces such as deglobalization and the Biden administration’s deficit spending were exacerbating price pressures.“The economy is being fueled by large amounts of government deficit spending and past stimulus,” he wrote.
The deficits of today eclipse those of the past, according to Mr. Dimon. He noted that what’s different this time around is that fiscal stimulus is taking place during a period of economic expansion rather than pulling the country out of a recession.
“There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure, and battling rising health care costs,” Mr. Dimon wrote. “This may lead to stickier inflation and higher rates than markets expect.”
His prediction of higher-for-longer inflation, made on April 8, has since been bolstered by both the CPI data released on April 10 and the wholesale inflation numbers released on April 11.
Mr. Dimon warned that the impacts of major economic and geopolitical forces—from high levels of debt and fiscal stimulus to the wars in Ukraine and the Middle East—could deliver nasty surprises to markets.
“There seems to be a large number of persistent inflationary pressures, which may likely continue,” he wrote.
The JPMorgan CEO then said that Americans should brace for a “very broad range” of Fed interest rates, ranging from 2 percent to 8 percent, “or even more, with equally wide-ranging economic outcomes.”
The worst-case scenario would be a combination of high inflation and recession—a toxic mix known as stagflation that would “not only come with higher interest rates but also with higher credit losses, lower business volumes, and more difficult markets.”
He said markets seem to be pricing a roughly 70 percent to 80 percent chance of a “soft landing,” meaning that the Federal Reserve’s interest rate hikes would cool the economy enough to lower inflation but without falling into recession.
“I believe the odds are a lot lower than that,” Mr. Dimon warned.
Despite predictions that the Fed’s aggressive rate-hiking cycle would trigger a recession, the numbers haven’t borne this out, in large part because of apparent labor market strength.
However, some preliminary signs of labor market weakness have emerged recently, clouding the economic horizon.
For instance, job cut announcements in the first quarter of this year rose by 120 percent from the final quarter of 2023, according to a report from career transitioning firm Challenger, Gray & Christmas.
