Inflation Comes in Hotter Than Expected in March
In March, the consumer price index (CPI) surged beyond expectations, intensifying inflation and diminishing hopes for an imminent interest rate cut by the Federal Reserve.
The Labor Department's Bureau of Labor Statistics reported a 0.4% increase in the CPI for the month, resulting in a 3.5% year-over-year inflation rate, which was 0.3 percentage points higher than February's level. Economists surveyed by Dow Jones had anticipated a 0.3% gain and a 3.4% year-over-year rate.
Excluding volatile food and energy prices, the core CPI also rose by 0.4% monthly and increased by 3.8% from a year ago, surpassing estimates of 0.3% and 3.7%, respectively.
Following the report, stock market futures declined, and Treasury yields surged.
The rise in the all-items index was primarily driven by shelter and energy costs. Energy prices climbed 1.1% after a 2.3% increase in February, while shelter costs, comprising about one-third of the CPI, rose by 0.4% for the month and 5.7% from a year earlier. The Fed's expectation of a slowdown in shelter-related costs throughout the year has been pivotal in its anticipation of cooling inflation, potentially leading to interest rate cuts.
Food prices saw a modest 0.1% increase for the month and a 2.2% rise year-over-year, with notable fluctuations within food categories. Prices for meat, fish, poultry, and eggs surged by 0.9%, driven by a 4.6% increase in egg prices, while butter prices fell by 5%, and cereal and bakery products declined by 0.9%. Food away from home increased by 0.3%.
Other notable changes included a 1.1% decrease in used vehicle prices and a 0.6% rise in medical care services prices.
This report comes amid market volatility and cautious statements from Fed officials regarding monetary policy. The Fed has emphasized patience in considering rate cuts, citing insufficient evidence of a consistent path toward their 2% annual inflation target. The March report reinforced concerns that inflation may be more persistent than anticipated.
Market expectations for rate cuts have shifted, with the first cut now expected in September instead of June, according to CME Group calculations.
Liz Ann Sonders, chief investment strategist at Charles Schwab, noted, "There’s not much you can point to that this is going to result in a shift away from the hawkish bent from Fed officials," indicating that a rate cut in June is unlikely.
The Fed's anticipation of easing services inflation throughout the year has also faced challenges. Excluding energy, the services index rose by 0.5% in March and was at a 5.4% annual rate, contradicting the Fed's target.
Seema Shah, chief global strategist at Principal Asset Management, remarked, "This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip," suggesting that a rate cut in July may also be improbable given the Fed's cautious stance.
Later in the day, the Fed will release minutes from its March meeting, providing further insights into officials' views on monetary policy. Recent comments from multiple Fed officials have expressed skepticism about rate cuts, with some suggesting that an increase may be necessary if economic data does not align with expectations.