A closely watched measure of inflation remained stronger than expected in March, troubling news for Federal Reserve officials who are increasingly concerned that their progress in reducing price increases may stall.
The surprisingly tough inflation reading has raised doubts among economists about when — and even if — the Fed might start cutting interest rates this year.
The Consumer Price Index climbed 3.8 percent on an annual basis after removing food and fuel prices, which economists do to better understand underlying inflation trends. That “core” index was stronger than the 3.7 percent increase expected by economists, and was unchanged from 3.8 percent in February. The monthly reading was also stronger than economists had predicted.
Counting food and fuel, measured inflation rose 3.5 percent in March from a year earlier, up from 3.2 percent in February and faster than economists had expected. Rising gas prices contributed to that inflation number.
This week’s inflation numbers come at a critical moment for the Fed. Central bankers are hoping to confirm that the warmer-than-expected inflation figures at the start of the year are just a seasonal quirk, not evidence that inflation is stuck above the 2 percent inflation target. Wednesday’s report offered some relief that the brisk early 2024 reading did not last.
“It is what it is: It’s a stronger-than-expected number, and it shows that price pressures are strong in goods and services,” said Blerina Uruci, chief US economist at T. Rowe Price. “This is problematic for the Fed. I don’t see how they can justify tapering in June with this strong data.”
Policymakers have made it clear in recent months that they want to see more evidence that inflation is cooling before they cut interest rates. Fed officials raised borrowing costs to 5.3 percent in 2022 and mid-2023, which they believe is high enough to significantly weigh on the economy. Central bankers forecast in March that they would cut interest rates three times this year.
But Fed officials do not want to cut rates before they are confident that inflation is on track to return to normal. Lowering borrowing costs too soon or too much risks allowing price increases to return. And if households and businesses expect inflation to stay slightly higher, officials worry it could be harder to get off the road.
The threat of prolonged inflation has become a more serious concern for policymakers since the beginning of the year. Inflation eased in January and February after months of steady declines, raising some alarm at the Fed and forecasters. Entering the year, investors had expected the Fed to cut rates sharply in 2024 — to about 4 percent — but expectations have continued to be scaled back. Investors have recently begun to expect two or three rate cuts.
Stocks futures fell sharply following the release of inflation as investors further scaled back their expectations for lower rates.
Investors want to see lower interest rates, which tend to boost prices for assets like stocks. But the Fed may be hard-pressed to explain why it’s cutting rates at the moment: Not only is inflation showing signs of moving beyond the central bank’s target, but the economy is growing at a relatively brisk pace. that pace and employers are hiring at a steady clip.
In short, the Fed’s policies do not appear to have pushed America to the brink of a recession – and in fact, there are signs that they may not have as big an impact as policymakers hope when it comes to growth. .
While the Fed officially targets Personal Consumption Expenditures inflation, a separate measure, the Consumer Price Index report released Wednesday comes out earlier and includes data coming in to other metrics. This makes it a closely watched signal of how price pressures are shaping up.
The details of the inflation report offer little reason to dismiss the gauge’s continued stubbornness as a fluke. They show that housing inflation has remained stable, car insurance costs have risen sharply and clothing prices have risen.
In a development likely to be particularly notable for Fed officials, a measure of services inflation contributed to the increase in annual inflation. Policymakers watch those prices closely, because they can reflect the strength of the underlying economy and because they tend to hold up over time.
The question, increasingly, is whether Fed officials can cut interest rates throughout the year in a world where inflation appears to be flatlining.
said Ms. Uruci noted that with each month that inflation remains stubbornly stubborn, the Fed may need to see more convincing evidence — and a more sustained return to deceleration — to feel confident that rate hikes are truly on the way. under control.
If the Fed doesn’t cut rates soon, the election could make the start of the cuts more politically charged. Central bankers are independent of the White House and generally insist that they do not make policy with an eye on the political calendar.
However, the reduction in the months before the election could put policymakers under a partisan spotlight: Donald J. Trump, the presumptive Republican nominee, has already painted possible rate cuts as a political ploy to help the Democrats.
But given inflation’s unexpected staying power, the Fed likely wants to take its time adjusting policy. Kathy Bostjancic, Nationwide’s chief economist, thinks rate cuts could now be delayed until this fall — if they even happen in 2024.
“The lack of moderation in inflation will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2 percent, and will likely delay rate cuts in September at the earliest and could push back the cuts. rate next year,” wrote Ms. Bostjancic in a note following the report.
