Housing and energy costs drove the consumer price index to a 0.4% increase in March, the same as in February, but above the estimate of economists.
Inflation came in hotter than expected in March, driven mainly by increases in housing and energy costs, the Labor Department reported on Wednesday.
The monthly increase in the consumer price index was 0.4%, the same as in February, above predictions for a 0.3% gain. On an annual basis, the CPI rose 3.5%, above the estimate for a 3.4% increase and compared to 3.2% in February.
Excluding often volatile food and energy costs, the core index rose 0.4% and 3.8% annually, above estimates for a 0.3% monthly and 3.7% annual gain.
“The index for shelter rose in March, as did the index for gasoline,” the release said. “Combined, these two indexes contributed over half of the monthly increase in the index for all items. The energy index rose 1.1% over the month. The food index rose 0.1 percent in March. The food at home index was unchanged, while the food away from home index rose 0.3 percent over the month.”
The pace of increase was in line with other recent inflation data that proves the price increases spurred by the pandemic may have receded, but are not yet extinguished.
“Disinflation is out and inflation is in with today’s CPI report,” said Karen Manna, client portfolio manager at Federated Hermes. “The forecasts for Fed easing this year will be reassessed even lower and (U.S. Treasury) rates will react strongly. While everyone expects the last mile to be difficult, the preference is for linear, observable activity and the inflation data is not cooperating.”
Markets have already shifted their stance on when the Federal Reserve may begin cutting interest rates. The first cut was expected in March earlier this year, but that quickly shifted to May and then to June. Now, even that date is being called into question as the odds shift to July.
Dow Jones Industrial Average futures tumbled 400 points after the report was released.
“Inflation has come down, but it looks like it’s stalled out, and some measures indicate it may be rising again,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co., ahead of the release. “As we’ve mentioned in previous commentaries, the last leg of the inflation fight is often the toughest to overcome.”
The Fed favors an inflation measure known as the personal consumption expenditures price report. That shows inflation has come down to an annual level of 2.5% overall and 2.8% for the core index.
The drop in economic activity that the Fed expected when it began aggressively raising interest rates in 2022 has not materialized, and both the economy and the labor market are very strong. That has allowed inflation to come in above the Fed’s preferred 2% annual target.
Fed Chairman Jerome Powell has recently reiterated that he still foresees rate cuts coming in 2024, though he has not indicated when that might be. Other Fed officials have of late suggested that maybe one or two cuts will be enough, with some saying it would not happen until late in the year.
The Fed will release minutes of its March meeting later Wednesday, and that may offer some insight into what Fed officials were thinking when they decided to keep interest rates steady last month.
Much will depend on whether the labor market softens – though there was no evidence of that in last Friday’s 303,000 monthly gain for March – and also if the pace of the economy slows. At the moment, the widely followed GDPNow model from the Federal Reserve Bank of Atlanta pegs first-quarter growth at 2.5%, though that is down from 2.8% a week ago.
“Wednesday’s CPI confirms that inflation is re-accelerating and we believe that rate cuts are off the table for the foreseeable future,” said Skyler Weinand, chief investment officer at Regan Capital. “While recent Fedspeak has oscillated between doves and hawks, we suspect that central bankers are getting nervous about inflation accelerating and will look to tame it through a prolonged stasis in rates and perhaps a rate hike in the not too distant future. While investors are strictly focused on rate cuts, we remind investors that rate hikes should not be dismissed and are a reasonable possibility.”