The 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 be delayed.
The unexpectedly stubborn inflation reading has raised doubts among economists about when — and even if — the Fed will be able to start cutting interest rates this year.
The Consumer Price Index climbed 3.8 percent year-on-year after stripping out food and fuel prices, which economists do to better understand the underlying trend in inflation. That “core” gauge was stronger than the 3.7% rise economists had expected and was unchanged from 3.8% in February. The monthly reading was also stronger than economists had predicted.
Including food and fuel, the measure of 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 this inflation number.
This week’s inflation data comes at a critical time for the Fed. Central bankers were hoping to confirm that the higher-than-expected inflation figures at the start of the year were just a seasonal quirk, not evidence that inflation is stuck well above the 2 percent target. Wednesday’s report offers some comfort that the bullish readings in early 2024 have not lasted.
“It is what it is: It’s a stronger-than-expected number and shows that these price pressures are strong across goods and services,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “It’s problematic for the Fed. I don’t see how they can justify a cut in June with this strong data.”
Policymakers have made clear in recent months that they want to see further evidence that inflation is easing before they cut interest rates. Fed officials raised borrowing costs to 5.3% in 2022 and mid-2023, which they believe is high enough to put a substantial strain on the economy. Central bankers predicted in March that they would cut interest rates three times this year.
However, Fed officials do not want to cut interest rates before they are sure that inflation is on track to return to normal. Cutting borrowing costs too soon or too much would risk allowing price increases to rebound. And if households and businesses expect inflation to remain slightly higher, officials worry it could make it even harder to eliminate the road.
This threat of lingering 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, causing concern for the Fed and forecasters. Going into the year, investors expected the Fed to cut interest rates sharply in 2024 — to about 4 percent — but they have steadily scaled back those expectations. Investors have recently come to expect only two or three rate cuts.
Stock futures fell sharply after the inflation release as investors further reduced their expectations for lower interest rates.
Investors would like to see lower interest rates, which tend to boost asset prices like stocks. But the Fed may struggle to explain why it’s cutting rates right now: Not only is inflation showing signs of sticking well above the central bank’s target, but the economy is growing at a fairly brisk pace and employers are hiring at a brisk pace.
In short, the Fed’s policies do not appear to have pushed America to the brink of recession—and in fact, there are signs that they may not have as much of an impact on growth as policymakers had hoped.
While the Fed officially targets personal consumption expenditure inflation, a separate measure, Wednesday’s consumer price index report is released earlier and includes data that feeds into the other measure. This makes it a closely watched signal of how price pressures are shaping up.
The details of the inflation report offered little reason to dismiss the gauge’s continued stubbornness as bad luck. They showed housing inflation holding steady, car insurance costs rising at a rapid pace and clothing prices rising.
In a development likely to be of particular note to Fed officials, a measure of services inflation contributed to the rebound in annual inflation. Policymakers watch these prices closely because they can reflect the strength of the underlying economy and because they tend to persist over time.
The question, increasingly, is whether Fed officials can cut interest rates at all this year in a world where inflation appears to be falling.
Ms. Uruci said that with each month that inflation remains stubborn, the Fed may need to see more convincing evidence — and a steadier return to the slowdown — to feel confident that price increases are really being brought under control.
If the Fed doesn’t cut rates soon, the election could make the initiation of cuts more difficult politically. Central bankers are independent of the White House and usually insist that they do not make policy with an eye on the political calendar.
But the cuts just before the election could put politicians on edge: Former President Donald J. Trump, the presumptive Republican nominee, has already described possible rate cuts as a political ploy to help Democrats.
But given the unexpected persistence of inflation, the Fed is likely to want to bide its time adjusting policy. Kathy Bostjancic, Nationwide’s chief economist, said rate cuts could now be delayed until this fall — if they happen in 2024.
“We now think September, if they start to cut rates, is more likely than July,” Ms Bostjancic said. “It underscores the belief that inflation is on that downward trend.”
