On April 10th, the Labor Department reported that U.S. consumer prices rose more than anticipated in March, driven by higher costs for gasoline and rental housing. This led financial markets to predict that the Federal Reserve would postpone cutting interest rates until September. The consecutive three months of robust consumer price data also indicated that the earlier inflation increase in January and February was not solely due to businesses raising prices at the beginning of the year, as previously believed by economists.
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| File photo: A customer shops at Paulina Market ahead of the Thanksgiving holiday in Chicago, Illinois, U.S. November 21, 2023. REUTERS/Vincent Alban/File photo Purchase Licensing Rights |
The report comes after last week's announcement that job growth picked up in March, resulting in a decrease in the unemployment rate from 3.9% in February to 3.8%. The persistently high cost of living is a major concern leading up to the presidential election on Nov. 5. However, there were some positive aspects, such as unchanged food prices at the supermarket and a decrease in the cost of motor vehicles, which led to deflation in goods prices.
Phillip Neuhart, director of market and economic research at First Citizens, commented, "While the data doesn't rule out the possibility of Fed action this year, it does reduce the likelihood of the Fed cutting the overnight rate in the next few months."
The Bureau of Labor Statistics from the Labor Department reported that the consumer price index increased by 0.4% last month, following a similar rise in February. Gasoline prices went up by 1.7% after a 3.8% increase in February. Shelter costs, including rents, also rose by 0.4%, which was the same as the gain in February.
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Gasoline and housing made up over 50% of the CPI's rise. While food prices increased by 0.1%, grocery food inflation remained the same due to decreases in the prices of butter, cereals, and bakery products, which saw their biggest monthly drop since 1989.
Meat and egg prices increased, while there was a slight rise in fruit and vegetable prices. The Consumer Price Index (CPI) rose 3.5% in the 12 months leading up to March, the highest increase since September. This was partly due to the drop of last year's low reading from the calculation. Economists had predicted a 0.3% monthly increase and a 3.4% year-on-year increase in the CPI.
Although the annual inflation rate has decreased from its peak of 9.1% in June 2022, the trend towards lower inflation has slowed down recently. The Federal Reserve has a 2% inflation target, and the measures it uses for monetary policy are significantly below the CPI rate.
President Joe Biden called on corporations, including grocery retailers, to lower prices using their record profits. He also announced plans to reduce housing costs by constructing and renovating over two million homes. A government watchdog organization, Accountable.US, criticized what it described as corporate greed contributing to persistently high inflation.
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Shortly after the release of the data, financial markets adjusted their expectations for the first rate cut, moving it from June to September, as indicated by CME's FedWatch Tool. The new expectation is for only two rate cuts, down from the three anticipated by Fed officials last month. Some economists believe that the opportunity for rate cuts may be diminishing.
The minutes of the Fed's March 19-20 meeting, published on Wednesday, revealed concerns among policymakers that progress on inflation may have stalled. The central bank has maintained its policy rate in the 5.25%-5.50% range since July and has increased the benchmark overnight interest rate by 525 basis points since March 2022.
Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis, commented that the strong inflation data will likely prompt the Fed to reassess their monetary policy plans for the year.
Following this news, stocks on Wall Street experienced a decline, the dollar strengthened against a basket of currencies, and U.S. Treasury yields increased.
Despite these developments, economists noted that excluding the volatile food and energy components, the CPI increased by 0.4% last month, indicating that inflation is not spiraling out of control. The monthly core CPI was driven by rises in rents, owners' equivalent rent (OER), motor vehicle insurance, motor vehicle repairs, and healthcare costs.
While there were also price increases in apparel and personal care, prices for used cars and trucks, recreation, and new vehicles decreased. Additionally, airline tickets became more affordable and the price of hotel and motel rooms remained unchanged.
Goods prices edged up by 0.1%, but excluding food and energy, they declined by 0.2%.
Source: Reuters