Gas prices surged 1.7% from February to March, while clothing costs increased by 0.7%. The average cost of auto insurance saw a significant jump of 2.6% last month and is up a 22% from a year ago
US inflation remains stubbornly high due to increased gas and rent prices, potentially delaying the Federal Reserve’s planned rate cuts.
The government report released on Wednesday showed that consumer inflation was boosted by gas, rents, car insurance and other items last month. Prices outside of the fluctuating food and energy sectors rose by 0.4% from February to March, maintaining the same accelerated pace as the previous month. Year-on-year, these core prices were up by 3.8%, unchanged from the rise in February.
The Fed closely monitors these core prices as they tend to provide a good indication of where inflation is headed. The figures for March, marking the third consecutive month of inflation readings significantly above the Fed’s target, provide worrying evidence that inflation is stuck at a high level after having steadily dropped in the second half of 2023.
These higher inflation measures threaten to scupper the prospect of multiple interest rate cuts this year. Fed officials have made it clear that with the economy in good health, they’re not in a hurry to cut their benchmark rate despite their earlier projections that they would reduce rates three times this year.
The figures will likely disappoint the White House as well, with Republican critics of President Joe Biden seeking to pin the blame for high prices on him and use it to derail his re-election bid. Polls show that despite a healthy job market, a near-record-high stock market and the steady drop in inflation, many Americans blame Biden for high prices.
The March inflation report “pours cold water on the view that the faster readings in January and February simply represented the start of new-year price increases that were not likely to persist,” Kathy Bostjancic, chief economist at Nationwide, said in a research note. “The lack of moderation in inflation will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2% and likely delays rate cuts to September at the earliest and could push off rate reductions to next year.”
On Wall Street, traders sent stock futures tumbling and bond yields rising, reflecting fear that the Fed may delay interest rate cuts indefinitely. Chair Jerome Powell has been emphasising in recent months that the Fed’s policymakers need more assurance that inflation is consistently slowing to the Fed’s 2% target.
This stance from Powell has heightened the importance of the monthly inflation reports, which can dictate when and by how much – or even if – the Fed will cut its key rate this year. Over time, rate cuts would result in lower borrowing costs for businesses and consumers and could also spark a stock market rally.
Consumer prices overall saw a rise of 0.4% from February to March, mirroring the increase seen in the previous month. When compared with the same period 12 months earlier, prices rose 3.5%, up from a year-on-year figure of 3.2% in February. Gas prices experienced a surge of 1.7% from February to March, while clothing costs increased by 0.7%. The average cost of auto insurance saw a significant jump of 2.6% last month and is up 22% from a year ago, partly due to purchases of higher-priced vehicles.
However, grocery costs remained stable last month and are 2.2% higher than they were a year ago, offering some respite to consumers after the massive spikes in food prices in 2022 and early 2023. The inflation surge that came in the wake of the pandemic pushed up the costs of food, gas, rent and many other items. Although inflation has since dropped dramatically from its peak of 9.1% in June 2022, average prices remain significantly above pre-pandemic levels.
Earlier this year, Wall Street traders had predicted that the Fed would reduce its key rate six or seven times in 2024. However, in March, Fed officials indicated they were planning for three rate cuts. But high inflation figures for January and February, coupled with signs of robust economic growth, led several Fed officials to suggest fewer rate cuts may be on the cards this year.
Last month saw a surge in hiring by employers, and the unemployment rate dropped to a low 3.8% from 3.9%. A report on manufacturing also revealed that factory output had expanded after over a year of contraction. These indicators of economic strength have further complicated the prospect of Fed rate cuts, which are usually implemented when the economy is faltering. With the economy in good health, some economists are questioning the need for rate cuts at all.
A strong economy also allows the Fed’s policymakers to take their time in deciding when and how much to lower borrowing costs for consumers and businesses.
At a press conference last month, Powell stated that strong hiring alone wouldn’t necessitate the Fed to postpone rate cuts. He pointed out that despite strong job gains last year, inflation still plummeted, largely due to an influx of available workers, primarily from increased immigration.
However, some other policymakers have expressed that recent data has given them cause for concern. Lorie Logan, president of the Federal Reserve Bank of Dallas, said last week that she believed it was too early to consider rate cuts.
