March Consumer Prices Up 3.5% Year-on-Year, Beat Expectations
In March, the Consumer Price Index (CPI), a measure of the cost of goods and services, surged unexpectedly, signaling a sharper rise in inflation and dashing hopes for imminent interest rate cuts by the Federal Reserve. The CPI climbed by 0.4% for the month, resulting in a 3.5% increase compared to the previous year, exceeding economists’ predictions. Even when excluding volatile food and energy prices, the core CPI still accelerated by 0.4% monthly and 3.8% yearly, surpassing expectations once more.
This report rattled the markets, with stocks tumbling and Treasury yields spiking upwards. The spike in the all-items index was primarily propelled by higher shelter and energy costs. Energy prices surged by 1.1%, while shelter costs climbed by 0.4% for the month and a substantial 5.7% from a year ago. Conversely, food prices only saw a marginal 0.1% increase for the month, despite notable spikes in meat, fish, poultry, and egg prices.
In contrast, used vehicle prices experienced a decline, while medical care services prices rose. Despite the uptick in inflation, real average hourly earnings for workers remained stagnant for the month, growing only by 0.6% over the past year.
This report arrived amid market uncertainty and caution from Fed officials regarding monetary policy. The Fed has been advocating for patience in cutting rates, awaiting more evidence that inflation is on a trajectory toward their 2% annual target. Previously, markets had anticipated rate cuts to commence in June, but after this report, expectations shifted to September.
Fed officials remain cautious, with some expressing skepticism about rate cuts. There are even suggestions that a rate hike may be necessary if the data fails to support a cut. Additionally, the Fed is concerned about the persistence of services inflation, which remains elevated even when excluding energy prices.
Subsequently, the Fed is set to release minutes from its March meeting, providing further insight into their stance on monetary policy. Several Fed officials have voiced doubts about reducing rates, with Atlanta Fed President Raphael Bostic foreseeing only one cut this year, likely in the fourth quarter. Governor Michelle Bowman has even hinted at the possibility of rate increases if the data does not align with expectations.
Overall, the March CPI report underscored the challenges facing policymakers, highlighting the complexities of managing inflation and economic recovery amidst uncertain market conditions and evolving consumer behaviors.
