US inflation refuses to bend, fanning fears it will stick
A key U.S. price gauge topped forecasts for a third consecutive month on gains in rents and transportation costs, spurring concerns that inflation is becoming entrenched and likely further delaying Federal Reserve interest-rate cuts.
The so-called core consumer price index, which excludes food and energy costs, increased 0.4% from February, according to government data out Wednesday. The year-over-year rate was unchanged at 3.8%, defying expectations for a downtick.
Financial markets were roiled by the numbers, which ignited the dollar and Treasury yields and sent the stock market tumbling. Paired with recent reports showing the labor market and economic activity have also been stronger than expected, investors no longer see much chance that the Fed will feel a need to start easing anytime soon.
“The sound you heard there was the door slamming on a June rate cut. That’s gone,” David Kelly, Jpmorgan Asset Management’s chief global strategist, said on Bloomberg Television.
Wednesday’s Bureau of Labor Statistics report revealed ongoing strength in rents, the largest components of the CPI. Forecasters have long been awaiting a deceleration based on leading indicators, but progress has more or less stalled over the past nine months.
Services inflation, meanwhile, accelerated — largely thanks to categories tied to transportation like car insurance and repairs, as well as health care. Core goods prices were a bright spot, resuming a downward trend that helped drive disinflation in the second half of 2023.
One important caveat: Many of the sources of strength in the March CPI data, like rents and auto insurance, will be more muted in the Fed’s preferred gauge, known as the personal consumption expenditures price index. That’s because they’re weighted less heavily in that report, which comes out later this month.
Still, the numbers were enough to completely reorder bets on the timing of Fed rate cuts. Before the report, traders were assigning roughly even odds to a first cut in June, according to futures. The chances of such a move dropped to about one in five afterward, and December is now the first month showing betterthan-even odds of a cut.
Chicago Fed President Austan Goolsbee, speaking at an event later Wednesday, said policymakers still have a way to go on cooling inflation. He noted that the trade-offs between bringing prices down and keeping employment high are going to be heightened in 2024.
Higher-for-longer interest rates may pose fresh challenges to President Joe Biden’s reelection campaign. Higher gasoline prices won’t help either.
While economists see the core gauge as a better indicator of underlying inflation than the overall CPI, the latter measure climbed 0.4% from the prior month and 3.5% from a year ago, marking an acceleration from February that was boosted by rising energy costs.