US inflation rose in March amid signs of delayed start to rate cuts

US inflation rose higher than expected last month, dealing another setback to the Federal Reserve’s ambitions of a soft landing.

The Personal Consumption Expenditures price index increased by 0.7 per cent per cent in March, the Commerce Department reported. On an annual basis, headline inflation rose by 2.7 per cent. Core PCE, which excludes food and energy, rose 2.8 per cent annually, unchanged from February but remained above economists’ expectations.

With evidence mounting that progress in taming inflation has stalled, the argument for the Fed to cut interest rates is becoming increasingly frayed.

“We still expect inflation to fall in the second half of the year, but it is difficult to see the Federal Reserve having sufficient confidence to cut rates anytime soon,” Michael Pearce, deputy chief US economist at Oxford Economics, wrote in a note to investors.

Markets now expect the US banking regulator to cut rates by only 25 basis points this year, according to CME’s FedWatch tool.

That would bring the Fed’s target range down to between 5 per cent and 5.25 per cent.

Any delay to cut US interest rates would also signal a delay in rate cuts in the UAE, Saudi Arabia and other GCC states, with the currencies in these countries being pegged to the US dollar.

It would also probably result in the continued strengthening of the US dollar, which would make it more difficult to engage in global trade. Emerging markets could be hit especially hard.

Even before the report’s release on Friday, markets were already bracing for a disappointing reading.

PCE inflation rose 3.4 per cent over the first three months this year, a steep increase from the 1.8 per cent increase the Commerce Department reported in the final quarter last year. Core PCE rose 3.7 per cent this quarter, up from 2 per cent.

Federal Reserve Chairman Jerome Powell said earlier that March’s inflation numbers would be similar to February, which came in at 2.8 per cent.

On the sidelines of International Monetary Fund and World Bank spring meetings in Washington, Mr Power said the recent data had “clearly not given us greater confidence” and, instead, indicates that it would probably take longer than expected to achieve that confidence.

Those comments were enough to prompt Federal Reserve Bank of New York president John Williams to walk back his optimistic view on rate cuts this year. The central bank is in “no rush” to dial back on its restrictive stance, he said.

The next Fed monetary policy meeting is scheduled to be held this week.