Stubbornly high US inflation grew stronger than expected in March

Stubbornly high US inflation grew stronger than expected in March
  • PublishedApril 11, 2024


Surging gas prices
 and sky-high mortgages and rent sent inflation rising more than expected in March, adding to Americans’ prolonged and painful battle with high costs. That could force the Federal Reserve to keep its punishing rates higher for longer.

US consumer prices picked up again last month, vaulting to a 3.5% increase for the 12 months ended in March, according to the latest Consumer Price Index data released Wednesday by the Bureau of Labor Statistics.

That’s up considerably from February’s 3.2% rate and marks the highest annual gain in the past six months. Wednesday’s report further highlights that the path to lower inflation remains extremely bumpy — and continue to be a drag on Americans’ hard-earned finances — and that any loosening of monetary policy might not happen soon.

President Joe Biden acknowledged Wednesday there is “more to do” to bring down inflation.

“Today’s report shows inflation has fallen more than 60% from its peak, but we have more to do to lower costs for hardworking families. Prices are still too high for housing and groceries, even as prices for key household items like milk and eggs are lower than a year ago,” Biden said in a statement.

Inflation has been a bane on Biden’s presidency, with voters consistently giving him low marks for his handling of the economy.

What this means for the Fed

“You can kiss a June interest rate cut goodbye,” Greg McBride, chief financial analyst for Bankrate, wrote in commentary issued Wednesday. Following the report’s release, the markets’ probability of a June rate cut sank to 21%, down from 53% on Tuesday and 73% last month, according to the CME FedWatch tool.

US stocks tanked Wednesday after the release of the hotter-than-expected inflation data, with the blue-chip Dow falling by more than 500 points. The S&P 500 lost 1% and the Nasdaq Composite fell by 1%.

On a monthly basis, prices were unchanged from February’s 0.4% gain.

Gas and shelter costs contributed more than half of that monthly increase, but price increases were broad-based, according to the BLS. Aside from prices falling in only a couple of categories — used and new cars as well as fuel oil — or remaining flat (grocery store food), prices rose in pretty much every major category last month.

Economists were expecting a 0.3% monthly increase and an annual rate of 3.4%, according to FactSet consensus estimates.

A stubborn ‘core’

The Fed has been wanting to see meaningful progress on inflation before it starts cutting rates.

The pace of price hikes slowed markedly in 2023, but that progress not only hit a roadblock to start this year, it moved into reverse.

Since the headline index can be heavily influenced by highly volatile categories such as food and energy, central bankers often look closely to the “core” index that strips out those categories.

However, core CPI did not slow as expected.

Excluding gas and food prices, categories that tend to be more volatile, core inflation rose 0.4% from the month before, bringing the annual rate to 3.8%, the same as February’s reading. Economists had anticipated a 0.3% monthly gain and for the annual rate to inch lower to 3.7%, according to FactSet.

“The headline number was expected to go up because of energy prices, but the fact that core came in hotter than expected is a real bummer,” Tyler Schipper, assistant professor in economics and data analytics at the University of St. Thomas in Minnesota, told CNN. “That’s the number to fixate on in terms of underlying inflation trends, and they are very persistent and very stubborn.”

On a three-month annualized basis, core inflation is running at 4.5%, Sarah House, managing director and senior economist at Wells Fargo, told CNN.

Car insurance spikes, other services climb

The housing component of inflation has proved frustrating for economists and other observers because even while the government’s evaluation of shelter costs — which have a time lag — remains high, private sources of more recent data have shown rent cooling over the past year.

On an annual basis, the shelter index in the March CPI didn’t budge from the 5.7% rate seen a month before.

“Shelter was a touch firmer, and I think that does continue to raise some doubt over how quickly and how far shelter inflation can cool ahead,” House said.

It’s not just shelter keeping services inflation stuck in the mud. The services excluding shelter index continued to outpace overall inflation, rising 0.5% for the month and 5.3% for the year, according to the report.

Medical care services, which saw prices fall slightly in February, bounced higher by 0.6% last month. Car insurance shot up by 2.6%, bringing the annual price hike to a distasteful 22.2%.

“We’re still seeing very stubborn services inflation,” she said. “This is the element that the Fed has really focused on. They feel like they have a better grip on goods prices and what’s going to happen ahead, but we’re still not seeing the improvement they need in the services sector if we’re going to continue to drive inflation significantly lower this year.”

Since the pandemic-era supply chain snarls resolved, the goods sector has helped overall inflation move lower because prices have not only slowed there but, in some cases, outright fallen.

However, supply chain pressures are building back up because of developments such as ongoing turmoil in the Red Seathe Panama Canal’s drought, and the Key bridge collapse that blocked the Port of Baltimore.

“You’re losing that disinflationary impulse from goods while you’re still waiting to see more progress on lowering services inflation,” House said.

A few silver linings, but a long road ahead

Economists have long expected that lower market-rate rents would help bring shelter inflation and overall inflation lower (the CPI’s measurement of shelter prices comes with a delay in how BLS captures the data and the natural lag effect of the signing of annual leases). But there still is hope on the services side, Schipper said.

“Wages are one of the primary inputs into services, and those have been relatively stable and coming down nicely in the labor market,” he said. “Hopefully that starts to put some calming pressure on services over the longer term.”

Additionally, grocery prices (categorized as “food at home” in the CPI report) were flat for the second month in a row and restaurant prices slowed 4.2% annually, the lowest rate since June 2021.

But even though food prices aren’t rocketing higher like they were, Americans are still feeling the pressure from rising prices for services-related businesses as well as at the gas pump.

It’s going to be a “slow, slow process” for inflation to get back to a place where consumers aren’t having to think about it in their daily lives, House said.

“Prices are not going to revert to where they were, so the best we can look for is a moderation in the rate at which prices are going up,” she said. “You see some stabilization in some key areas like the grocery store; but overall, you’re still going to see consumers bothered by the current price environment for some time.”

SOURCE: CNNNEWS

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