The prevailing economic consensus, indicating a potential soft landing, has encountered a hurdle as recent January data contradicts the optimistic narrative. A series of robust economic data over the past months had fostered the belief in a soft landing, characterized by inflation easing to the Federal Reserve’s 2% target without a severe economic downturn.
However, the latest data released in January challenges this narrative. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) for January reported higher-than-expected price increases, while the retail sales report for the same month revealed a drop exceeding economists’ projections. This unexpected turn indicates that neither inflation nor consumer strength has shown signs of improvement.
While some argue that one month’s data might not alter the overall trend significantly, the notable aspect is that this marks the first set of data challenging the soft landing narrative since Federal Reserve Chair Jerome Powell hinted at the possibility of an ideal economic outcome during the December Fed meeting.
Before the recent readings, economic data had been supportive, with higher-than-expected fourth-quarter economic growth, surprising January jobs reports, and better-than-anticipated December retail sales. However, the January data has prompted economists to revise down their projections for first-quarter gross domestic product (GDP), a key measure of economic growth. Goldman Sachs, for instance, adjusted its forecast from 2.9% annualized growth to 2.3%, reflecting a less optimistic outlook.
Projections for Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, are also being adjusted based on the latest data. Core PCE is expected to have increased in January, potentially exceeding the Fed’s 2% target. This challenges the inflation component of the soft landing scenario.
Bank of America economists noted that the January inflation data suggests a setback in the disinflation trend and supports the Fed’s cautious approach to interest rate cuts. They now align with the market consensus, projecting the first interest rate cut in June, a shift from earlier expectations of cuts in March or May.
Investors are recalibrating their expectations, with the probability of the first rate cut in May now standing at approximately 35%, compared to 97% a month ago. Despite these shifts, the question remains whether the unexpected data points of inflation and consumer strength have disrupted hopes for a soft landing.
Analysts, including Bank of America’s Stephen Juneau and Michael Gapen, suggest that it is too early to draw definitive conclusions. They advocate a “wait-and-see” approach, emphasizing the need for additional data in the coming weeks to assess the trajectory of the economy.
Consumer sentiment remains positive for now, but uncertainties persist as the economic landscape unfolds amid evolving data trends.
