by Zain Jaffer
The Fed reported in January 2024 that the previous month’s inflation rate climbed from 3.1% to 3.4%, which brings it farther from the target 2% inflation rate and was higher than forecasted. This is bad news for those who were expecting interest rate cuts in 2024, probably since they think that the Democrats will want to ease economic pressures on Americans prior to the November presidential elections. The Fed acts independently of the White House but hidden political pressure will likely be brought to bear to try and influence it.
According to the US Bureau of Labor Statistics (BLS) which issues these figures monthly, inflation reached 0.3%, while core inflation, which does not count the volatile costs of food and energy, was at 3.9%. Core inflation was down from 4% in November but still above the forecasted 3.8% for December.
The biggest contributors were housing and shelter costs, which the BLS said accounted for more than half of the gain. Year-over-year, total shelter costs rose by 6.2%, while rent increased by 6.5%.
The fact that inflation remains sticky is bad for several reasons. The US Fed cannot just lower rates and risk inflation roaring back at a higher rate than before. Higher for longer interest rates mean that debt remains expensive.
Aside from higher construction costs and rental costs for housing, food and energy price rises will stretch individual and family budgets further. More importantly, the higher for longer interest rates make home mortgages, credit card, car loans, and other loans more expensive. Plus some individuals have student loans they need to pay.
That means retail businesses large and small who are dependent on buyer’s discretionary incomes will again expect lower revenues in 2024. If potential Apple iPhone buyers for example have no extra discretionary money after paying all their bills and debts, no matter how sleek and nice the new phone is, it may not sell.
Add to that the fact that $1.78T in corporate debt is maturing over the next few months and years and will need to be renegotiated. Real estate developers finance projects mostly with debt, and regular companies often need debt for their capital expansion, operations and maintenance requirements. Much of the maturing debt were done with lower pre-Fed hike interest rates. At the higher rates, many of these companies may find that it may no longer make sense to continue with the debt.
Some office commercial real estate (CRE) properties in certain major cities like San Francisco, Los Angeles, and others suffer from low occupancy and high vacancy. If these projects have to renegotiate at higher rates, coupled with low expected lease and rental revenues, they may need to foreclose or discontinue. Regular companies may be forced to shut down, lay off workers, or delay expansion plans.
Companies that were expecting some reprieve from high rates this year may need to further tighten their belts because of the reasons above. Unfortunately some of them may no longer be able to hold out for better days, unless the Fed actually decides to lower rates this year.