U.S. inflation higher than expected, giving Fed cause to pause
Concern rate cuts will be delayed indefinitely
WASHINGTON • Inflation remained high last month, boosted by gas, rents, auto insurance and other items, the government said Wednesday in a report that will likely give pause to the United States Federal Reserve as it considers how often — or even whether — to cut interest rates this year.
Prices outside the volatile food and energy categories rose 0.4 per cent from February to March, the same accelerated pace as in the previous month. Measured from a year earlier, these core prices were up 3.8 per cent, unchanged from the yearover-year rise in February. The Fed closely tracks core prices because they tend to provide a good read of where inflation is headed.
Wednesday’s figures represent a disappointment for the White House. Republican critics of President Joe Biden have sough to pin the blame for high prices on the president and use it as a cudgel to derail his re-election bid. Polls show that despite a healthy job market, a near-record-high stock market and a decline in inflation from its peak, many Americans blame Biden for high prices.
The March figures, the third straight month of inflation readings well above the Fed’s two per cent target, threaten to torpedo the prospect of multiple interest rate cuts this year.
The report “pours cold water on the view that the faster readings in January and February simply represented the start of new-year price increases that were not likely to persist,” Kathy Bostjancic, chief economist at Nationwide, said in a research note.
“The lack of moderation in inflation will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2% and likely delays rate cuts to September at the earliest and could push off rate reductions to next year.”
On Wall Street, traders sent stock futures tumbling and bond yields rising, reflecting fear that the Fed may delay interest rate cuts indefinitely.
Chair Jerome Powell has stressed that the Fed’s policy-makers need more confidence that inflation is steadily slowing to the Fed’s two per cent per cent target. Powell’s stance has elevated the profile of the monthly inflation reports, which could determine when and by how much — or even whether — the Fed will reduce its key rate this year. Rate cuts would lead, over time, to lower borrowing costs for businesses and consumers and could also fuel a stock market rally.
Overall consumer prices rose 0.4 per cent from February to March, also the same as the previous month. Compared with 12 months earlier, prices rose 3.5 per cent, up from a year-over-year figure of 3.2 per cent in February.
The persistence of elevated U.S. inflation complicates Biden’s claims to be making steady progress against higher prices. The president has argued that further improvement would be possible if Republicans in Congress would back his policies.
“My agenda is lowering costs for prescription drugs, health care, student debt and hidden junk fees,” Biden said in a statement.
The costs of owning a vehicle were a key reason why prices jumped last month: Auto insurance surged 2.6 per cent just in March and are up a dramatic 22 per cent from a year ago. That increase reflects, in part, the rise in new-car prices over the past two years.
Average auto repair costs increased 1.7 per cent from February to March and are up a sharp 8.2 per cent from a year earlier. And the price of gasoline to power most vehicles surged 1.7 per cent last month. Prices for new and used cars, though, fell slightly.
Clothing costs jumped 0.7 per cent in March, the second straight month of sizable increases, though they have barely risen over the past year. Grocery prices, though, were unchanged last month and are 2.2 per cent higher than they were a year ago, providing some relief to consumers after the huge spikes in food prices in the previous two years.
The chronically elevated inflation so far this year suggests that American consumers, on average, remain confident enough to keep spending despite steady price increases, said Laura Rosner-warburton, senior economist at Macropolicy Perspectives, a consulting firm. Likewise, she said, the surge in auto insurance and repair costs reflect the previous sharp increases in auto sales prices.
“It means that the consumer’s in good shape and accepting price increases still,” Rosner-warburton said.
Though inflation has plummeted from its peak of 9.1 per cent in June 2022, average prices are still well above where they were before the pandemic. This has meant hardships for many lower-income families, whose wages may not have fully kept up with rising prices.
Derrick Chubbs, president of the Second Harvest Food Bank of Central Florida, said his organization is providing 300,000 meals a day, even more than the 250,000 it supplied in November 2022. The people his organization serves, he said, increasingly include homeowners. And most of them are employed.
Chubbs said the beneficiaries typically live paycheque-to-paycheque and are vulnerable to any sharp change in their financial circumstances. Most are still struggling to recover from the jump in costs over the past three years, including in rents, child care and car ownership — practically a necessity in a region with limited public transportation.
“If anything throws them off, it’s going to take them a while to recover,” Chubbs said. “Just because things get better, that doesn’t mean that I’ve caught up with everything.”
THE LACK OF MODERATION IN INFLATION WILL UNDERMINE FED OFFICIALS’ CONFIDENCE THAT INFLATION IS ON A SUSTAINABLE COURSE BACK TO 2% AND LIKELY DELAYS RATE CUTS TO SEPTEMBER AT THE EARLIEST. — KATHY BOSTJANCIC, CHIEF ECONOMIST AT NATIONWIDE