The consumer price index (CPI) rose at a faster pace than expected in March, leading to an increase in inflation and reducing the likelihood of interest rate cuts by the Federal Reserve. The CPI increased by 0.4% for the month, resulting in a 3.5% year-over-year inflation rate. Excluding food and energy components, the core CPI also accelerated 0.4% on a monthly basis and rose 3.8% from a year ago. The stock market declined and Treasury yields rose after the report was released. Energy and shelter costs were the main factors driving the increase in the all-items index, with shelter costs up 5.7% from a year ago.
Food prices only increased by 0.1% on the month, with some categories experiencing significant gains while others declined. Meat, fish, poultry, and eggs saw a 0.9% increase, led by a 4.6% rise in egg prices. However, prices for butter fell by 5% and cereal and bakery products declined by 0.9%. Food away from home increased by 0.3%. Used vehicle prices fell by 1.1%, while medical care services prices rose by 0.6%. Real average hourly earnings remained flat on the month and increased by only 0.6% over the past year for workers, according to a separate release from the Bureau of Labor Statistics.
Inflation is concerning for Federal Reserve officials, who have been cautious about the direction of monetary policy. The Fed has called for patience on cutting interest rates, stating that they have not seen sufficient evidence of inflation returning to their 2% annual goal. The report in March confirmed fears that inflation is stickier than anticipated. Market expectations for interest rate cuts shifted following the release of the data, with traders pushing expectations for the first rate cut out to September from June. Fed officials have expressed skepticism about lowering rates, with some suggesting only one cut this year and others hinting at the possibility of an increase if data does not align with expectations.
While the Fed expects services inflation to decrease throughout the year, the latest data showed an increase in the services index, inconsistent with the Fed’s target. The strong readings on inflation suggest that the previous disinflationary narrative may no longer be applicable. Even if inflation cools in the next report, there may still be caution within the Fed, delaying the possibility of an interest rate cut in July. The release of minutes from the Fed’s March meeting later in the day will provide further insight into officials’ views on monetary policy and interest rates.
The acceleration in inflation in March is likely to have a significant impact on market expectations and the timing of potential interest rate cuts by the Federal Reserve. With inflation rising at a faster pace than expected, Fed officials may need to reassess their stance on monetary policy and the possibility of rate cuts in the near future. The data highlights the challenges the Fed is facing in achieving its inflation target and the need for continued monitoring and adjustment of monetary policy based on economic indicators and market conditions.
