Rising gas prices and soaring mortgages and rents have led to a higher-than-expected increase in inflation for March, adding to the ongoing financial strain for Americans. This surge may compel the Federal Reserve to maintain its current high-interest rates for an extended period.
According to the latest data from the Bureau of Labor Statistics released on Wednesday, US consumer prices rose by 3.5% over the past 12 months, a significant increase from February’s rate of 3.2%. This marks the highest annual gain in inflation over the past six months, underscoring the persistently challenging path toward reducing inflationary pressures, which continue to burden the finances of many Americans. Consequently, any potential easing of monetary policy is unlikely to occur in the near future.
President Joe Biden acknowledged the need for further action to address inflation, stating on Wednesday that while there has been some decrease from its peak, more efforts are required to alleviate the financial strain on hardworking families. Despite certain household items experiencing lower prices compared to a year ago, housing and grocery costs remain disproportionately high.
Inflation has presented a significant challenge during Biden’s presidency, contributing to consistently low approval ratings for his economic management.
Is a June Interest Rate Cut Off the Table? Stock Market Reacts to Surging Inflation
Greg McBride, chief financial analyst for Bankrate, stated in a commentary released Wednesday that any hopes for a June interest rate cut can be discarded. This sentiment was reflected in the market, with the probability of a June rate cut dropping to 21% following the release of the inflation data, down from 53% the previous day and 73% the previous month, according to the CME FedWatch tool.
US stocks experienced a sharp decline on Wednesday after the release of the inflation data, with the Dow falling by over 500 points. The S&P 500 decreased by 1%, while the Nasdaq Composite dropped by 1%.
Month-over-month, prices remained unchanged compared to February’s 0.4% gain. The increase in gas and shelter costs accounted for more than half of this monthly rise, although price increases were widespread across various categories, according to the Bureau of Labor Statistics (BLS). With the exception of a few categories such as used and new cars, as well as fuel oil, where prices either fell or remained stagnant (such as grocery store food), prices increased across almost every major category last month.
Economists had anticipated a 0.3% monthly increase and an annual rate of 3.4%, according to FactSet consensus estimates.
Core CPI Unyielding Despite Expectations
The Federal Reserve has been eagerly awaiting substantial progress on inflation before considering any rate cuts. Despite a notable slowdown in the pace of price increases throughout 2023, this progress encountered a significant setback at the beginning of the current year, shifting into reverse.
Given that the headline inflation index can be significantly influenced by volatile categories like food and energy, central bankers often turn their attention to the “core” index, which excludes these categories.
However, contrary to expectations, the core Consumer Price Index (CPI) did not decelerate as anticipated. After excluding gas and food prices, which are typically more volatile, core inflation surged by 0.4% from the previous month. This pushed the annual rate to 3.8%, mirroring February’s reading. Economists had foreseen a more modest 0.3% monthly increase, with the annual rate expected to slightly decline to 3.7%, according to FactSet.
Tyler Schipper, an assistant professor in economics and data analytics at the University of St. Thomas in Minnesota, expressed disappointment, stating, “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. That’s the number to fixate on in terms of underlying inflation trends, and they are very persistent and very stubborn.”
Furthermore, on a three-month annualized basis, core inflation is currently running at 4.5%, according to Sarah House, managing director and senior economist at Wells Fargo. This data underscores the persistent and stubborn nature of underlying inflation trends, highlighting the challenges faced in addressing inflationary pressures.
Challenges Persist in Housing and Services Inflation Amidst Supply Chain Pressures
The housing component of inflation has become a source of frustration for economists and other observers. Despite the government’s assessment of shelter costs, which has a time lag, remaining high, recent private data sources indicate a cooling trend in rent over the past year.
In March, the shelter index within the CPI showed no change from the 5.7% rate recorded the previous month, maintaining concerns about the potential slowdown in shelter inflation.
According to Sarah House, this stability in shelter costs raises doubts about the pace and extent of any cooling in shelter inflation moving forward.
However, it’s not just shelter that’s contributing to stagnant services inflation. The services excluding shelter index continued to surpass overall inflation, increasing by 0.5% for the month and 5.3% for the year, as reported.
Certain sectors like medical care services saw a rebound in prices after a slight decline in February, while car insurance witnessed a notable 2.6% increase, resulting in an annual price hike of 22.2%.
Despite improvements in the goods sector following pandemic-related supply chain disruptions, inflation remains stubbornly high in services, a key focus for the Federal Reserve. Sarah House emphasized the need for progress in lowering services inflation to drive overall inflation lower this year.
However, supply chain pressures are resurfacing due to various factors such as ongoing disruptions in maritime routes and infrastructure issues like the Key bridge collapse, potentially reversing the disinflationary trend seen in the goods sector.
Sarah House highlighted the importance of addressing service inflation while dealing with renewed supply chain challenges.
Challenges and Hopes in Tackling Inflation: Insights from Economists
Economists have long anticipated that declining market-rate rents would help alleviate shelter inflation and subsequently reduce overall inflation. However, due to the lag in data capture by the Bureau of Labor Statistics (BLS) and the natural delay in annual lease signings, the impact has been delayed. Nonetheless, there remains optimism regarding the services sector, according to Schipper.
Schipper highlighted that wages, a primary input into services, have remained relatively stable and are gradually decreasing in the labor market. This trend is expected to exert calming pressure on services inflation over the long term.
In addition to developments in the services sector, recent data from the Consumer Price Index (CPI) report provides some relief. Grocery prices, categorized as “food at home,” remained unchanged for the second consecutive month, while restaurant prices saw a 4.2% annual slowdown, the lowest rate since June 2021.
However, despite the stabilization in food prices, Americans continue to face pressure from rising prices in service-related businesses and at the gas pump.
Sarah House emphasized that the path toward inflation moderation will be gradual. She noted, “It’s going to be a slow, slow process” for inflation to return to levels where consumers no longer feel its impact on their daily lives. While certain areas like grocery prices show signs of stabilization, the overall price environment is expected to continue to trouble consumers for some time.
In summary, while there are hopeful signs in certain sectors, and wage stability may provide some relief, the journey toward alleviating inflationary pressures is anticipated to be slow and prolonged.
