Slow Cool Down in Inflation: Factors Contributing to Economic Strength and Federal Reserve Policy Decisions

Inflation has been slow to cool down despite the robust economic activity in the US. While price pressures are expected to ease as the year progresses, it will likely be a slower process than initially forecasted. This slow inflation cooling will impact Federal Reserve policy decisions, with expectations now pointing towards policy rates remaining unchanged for a few months before eventual cuts later in the year.

One key factor contributing to the recent economic strength is the larger labor pool brought about by increased net migration flows in 2023. This surge in migration has resulted in a higher number of available workers, with the influx of new labor-force entrants being the highest seen in the last three years. This increase in the labor pool is providing crucial support to the economy and shaping the overall economic outlook.

The strong economic growth in the US has allowed the Federal Reserve to be patient in their decision-making process, leading to a likely delay in anticipated interest-rate cuts. The first quarter of the year saw impressive economic activity, fueled by strong hiring and decreasing inflationary pressures that increased consumer spending and kept growth steady. This trend is expected to continue thanks to shifting demographic trends, prompting an increase in the forecast for 2024 full-year GDP growth to 1.5% in real terms.