Dramatic spikes in gas prices and sky-high housing expenses have driven inflation to unexpected heights in March. This intensifies Americans’ ongoing struggle with flying costs, which could force the Federal Reserve to prolong its punishing rates.
Notably, US consumer prices increased by 3.5% over the past 12 months, a huge jump from February’s 3.2%, marking the highest annual gain in six months. Recent data from the Bureau of Labor Statistics show a rough road toward lower inflation, posing a continued strain on Americans’ hard-earned finances. Moreover, it suggests that monetary policy might not be close.
President Joe Biden admitted there is “more to do” to bring down inflation. He said, “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.”
It’s sad, but inflation has posed a huge challenge throughout Biden’s presidency. This has even made voters consistently give him low marks for handling the economy.
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Impact on Fed Policy and Market Reaction
The recent inflation data has altered expectations for Federal Reserve actions, with hopes of a June interest rate swiftly dissipating. According to Greg McBride, chief financial analyst for Bankrate, the probability of a June rate cut sank to 21%, down from 53% a day prior and 73% a month ago, as indicated by the CME FedWatch tool.
The market response was swift and severe. This is due to US stocks taking a huge hit after the hotter-than-expected inflation figures were released. The Dow fell by more than 500 points, and the S&P 500 and Nasdaq Composite fell by 1%.
Regarding monthly charges, prices remained fixed compared to February’s 0.4% gain. However, the BLS noted broad-based price hikes across various categories. Notable exceptions, such as new cars, fuel oil, and grocery store food, were used, which either saw price decreases or remained unchanged.
According to FactSet consensus estimates, these figures deviated from economists’ expectations of a more modest 0.3% monthly increase and an annual rate of 3.4%.
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The Persistence of Core Inflation
Despite hopes for progress in curbing inflation, particularly in the core index, the Fed’s desired momentum has yet to materialize. While price increases slowed notably in 2023, the beginning of this year witnessed a reversal of that progress.
Due to the headline index’s susceptibility to fluctuations in volatile categories such as food and energy, central bankers often turn to the “core” index that strips out those categories.
However, core CPI did not slow as expected. Excluding gas and goods prices, core inflation increased by 0.4% from the previous month, maintaining the annual rate at 3.8%, the same as February’s reading. Economists relying on FactSet estimates had projected a 0.3% monthly gain, with the yearly rate decreasing to 3.7%.
Tyler Schipper, assistant professor in economics and data analytics at the University of St. Thomas, explained the meaning of this unexpected uptick. This is particularly true in terms of underlying inflation trends. He described it as “very persistent and very stubborn.” Sarah House, managing director and senior economist at Wells Fargo, further noted that core inflation is 4.5%.
A Few Silver Linings and a Bumpy Road
Despite the persistent inflation, there is still hope. Economists have anticipated that lower market-rate rents would help ease shelter and overall inflation lower. However, due to the delay in the BLS data capture methods and the natural lag, the full impact of these changes may not be quickly reflected.
Regardless, Tyler Schipper points to potential optimism on the services front. While the road ahead remains long and filled with obstacles, there are indications that progress may be achievable in addressing inflationary pressures. This is particularly true within the services sector.
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