US inflation rose faster than expected in March
The annual US inflation in March once again proved more stubborn than forecasters had expected.
The cost of living rose 3.5% over the last 12 months as of March, up from a 3.2% annual increase in February, driven up mainly by gas prices according to the Consumer Price Index released by the Bureau of Labor Statistics Wednesday.
That was the highest since September and higher than the 3.4% annual rate forecasters had expected, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.
It was the third Consumer Price Index report in as many months showing inflation running hotter than forecast, complicating the job of the Federal Reserve, the central bank tasked with bringing inflation under control. Fed officials have held the influential fed funds rate at a 23-year high since July, pushing up interest rates on all kinds of loans to slow the economy and cool inflation.
They’ve been watching economic data such as Wednesday’s report for signs that inflation is firmly on the path down to their target of a 2% annual rate, looking for an opening to cut interest rates and take some upward pressure off mortgages, credit cards, and other credit costs that are at or near the highest in decades.
The chances of the Fed cutting its interest rate at its meeting in June plummeted in the wake of Wednesday's report according to the CME Group's Fedwatch tool, which forecasts rate movements based on fed funds futures trading data. Markets were pricing in just a 23.2% chance of a rate cut Wednesday after the report, down from more than 50% the day before.
In speeches before the inflation report, Federal Reserve chair Jerome Powell and other members of the Federal Open Market Committee (FOMC), the group that sets interest rates, gave various assessments of the inflation outlook, with some officials more willing than others to look past the flare-up of inflation in January and February as an anomaly. The third overheated inflation report in a row gives ammunition to those who favored keeping interest rates higher for longer to ensure inflation is subdued.
"The Fed will be in no rush to cut rates until price pressures subside," Ali Jaffery, an economist at CIBC, wrote in a commentary.
"The big question for the FOMC is what is behind this pickup in inflation to start 2024. Powell seems to believe residual seasonality is playing a big role and that still seems plausible. But it is now very hard to also discount the risk that firm demand in the economy is keeping services prices elevated with solid consumer spending and a jobs market that just keeps on giving."
So-called core inflation, which excludes volatile prices for food and energy, stayed at 3.8% in February, hovering at its lowest since May 2021, kept in check by falling prices for cars. But it was higher than the drop to 3.7% that economists had forecast.
Policymakers at the Fed view “core” inflation as a better indicator of the direction of inflation, since prices for food and gas tend to rise for reasons that have nothing to do with overall inflation trends.
Gas prices typically rise in the spring, and have been going up faster than usual because of tensions in the Middle East, as well as the war in Ukraine driving up the price of the crude oil that it’s made from.