Higher US worker productivity (output per hour worked), after a sharp pandemic-related dip, could help allay market and policymaker concerns about wage inflation.
But other factors are still pushing up the cost of living. Geopolitical conflicts in the Middle East and the Red Sea create inflation risk from higher energy prices and supply chain disruptions.
In the January Institute of Supply Management (ISM) survey, it was noted that unrest in the Red Sea and congestion at the Panama Canal were delaying deliveries and driving prices higher. Supplier delivery times rose again after three months of declines. The ISM prices index surged to 64 in the January report, marking its highest reading since February 2023.
Thanks to continued strength in the US labour market, resilient company earnings, and sticky inflation, markets have scaled back their expectations of imminent interest rate cuts. A March rate cut by the Fed is now seen as very unlikely, and the odds of a move in May have fallen back to about 60% from over 80% just a few weeks ago. Expect the Fed to take its time.
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