March was another strong month for U.S. inflation, rising 3.5%, but this latest data casts doubt on whether the Federal Reserve will actually start cutting interest rates in June.
The figure marked the highest year-on-year increase since December, when inflation was 3.4%.
The consumer price index (a measure of changes in the cost of everyday goods and services) in March was slightly above the 3.4% headline inflation rate expected by economists polled by FactSet, and up slightly from February’s 3.2%.
The reading could come as cold comfort to Fed officials, who have repeatedly said they are committed to keeping inflation down to 2%, a number not seen for the U.S. economy in more than a decade. expensive.
When inflation persists, as it has in recent months, the Fed has traditionally raised interest rates further to slow the economy, even though the benchmark federal funds rate is currently at a 22-year high.
Fed officials have already indicated that a rate cut in 2024 may not be on the cards.
“If inflation continues to trend flat, you’re going to question why we need to cut rates at all,” Minneapolis Fed President Neel Kashkari said in a previously reported interview last week. CBS.
A day later, on Friday, Fed Director Michelle Bowman said interest rates could rise further.
“While this is not my baseline outlook, I continue to see the risk that if inflation stalls or even reverses, we may need to raise policy rates further at future meetings. ” Bowman said in prepared remarks to a group of Fed watchers. Friday in New York.
“Reducing policy rates too soon or too early could lead to an inflationary backlash, and further future increases in policy rates would be needed to bring inflation back to 2% in the long term,” he said. added. CNBC.
The surprisingly strong March jobs report, which beat economists’ expectations and showed employers adding a whopping 303,000 jobs last month, also didn’t help much when considering the timing of the rate cut.
Historically, a strong job market has kept wages and consumer spending levels rising, thereby fueling inflation and interest rates, with Wall Street leading Fed officials to triple interest rates (cumulatively 0.75 percentage point) by the end of the year. It is widely expected that prices will decline.
The latest economic indicators are clouding the path ahead, especially after Federal Reserve Chairman Jerome Powell said prior to the CPI release that central bankers would “use future data to guide policy decisions.” .
In the same remarks he prepared for an audience at the Stanford Graduate School of Business last week, Powell added that interest rates could start to fall as inflation cools.
But data released Wednesday by the Bureau of Labor Statistics showed price increases were primarily driven by housing and gasoline, which rose 0.4% on a monthly basis, contributing more than half of the increase.
Indexes such as auto durability, medical, apparel, and personal care also contributed to the increase.
Meanwhile, indexes for used cars, trucks, recreational vehicles and new vehicles declined, and the food index rose only 0.1% in March.
Core CPI (a figure that excludes volatile food and energy prices) was 3.8%, flat from February.
The figure, a key measure of underlying inflation, was also higher than the 3.7% expected by economists surveyed by FactSet.
The latest CPI data means consumer prices have yet to fall year-on-year since President Joe Biden’s term began in January 2021.
The closest the economy came to negative annual growth since President Biden took office was in July 2022, and inflation remains “steady” at a very high 8.5%.
