U.S. consumer prices rose more than expected in March due to higher costs for gasoline and rental housing, prompting financial markets to predict that the Federal Reserve would delay cutting interest rates until September. This comes after strong job growth numbers in March and Fed Chair Jerome Powell’s statements that the central bank is not in a rush to lower borrowing costs. The cost of living is a significant factor in the upcoming U.S. presidential election.
The consumer price index (CPI) increased by 0.4% in March, following the same margin of growth in February. Gasoline prices rose by 1.7%, while shelter costs, including rents, also increased by 0.4%. Gasoline and shelter accounted for over half of the CPI increase, while food prices only rose by 0.1%. In the last year, the CPI has risen by 3.5%, the highest since September, with the Fed’s inflation target being 2%.
Despite the annual increase in consumer prices declining from a peak of 9.1% in June 2022, the disinflationary trend has slowed down recently. Financial markets have adjusted their expectations for the first rate cut from June to September, with only two rate cuts now expected instead of the three previously predicted by Fed officials. The central bank has maintained its policy rate in the 5.25%-5.50% range since July, after raising the benchmark overnight interest rate by 525 basis points since March 2022.
The core CPI, which excludes food and energy, also rose by 0.4% in March, following similar increases in February and January. This was driven by a 0.5% increase in rents and higher costs for motor vehicle insurance, healthcare, apparel, and personal care. However, prices for used cars and trucks, recreation, and new vehicles fell. Services excluding energy saw a solid 0.5% increase, matching February’s rise. In the 12 months through March, the core CPI rose by 3.8%.
Following the release of this data, U.S. stocks opened lower, the dollar strengthened against a basket of currencies, and U.S. Treasury prices fell. While the possibility of a Fed rate cut this year has not been completely ruled out, the chances of one happening in the next few months have diminished. The Fed’s focus on inflation and economic indicators will continue to play a significant role in shaping its monetary policy decisions going forward.
