NEW YORK - A key gauge for US consumer prices topped forecasts for a third straight month, spurring concerns that inflation is becoming entrenched and likely further delaying US Federal Reserve interest rate cuts.
The so-called core consumer price index (CPI), which excludes food and energy costs, increased 0.4 per cent from February, according to government data out on April 10. The year-on-year rate was unchanged at 3.8 per cent, defying expectations for a downtick.
Financial markets were roiled by the numbers, which ignited the US dollar and Treasury yields and sent the stock market tumbling.
Paired with recent reports showing the labour market and economic activity have also been stronger than expected, investors no longer see much chance that the Fed will feel a need to start easing any time soon.
“The sound you heard there was the door slamming on a June rate cut. That’s gone,” Dr David Kelly, JPMorgan Asset Management’s chief global strategist, said on Bloomberg Television.
Reacting to the report, US President Joe Biden said he stands by his prediction that the Fed would cut rates by the end of 2024.
“Well, I do stand by my prediction that, before the year is out, there’ll be a rate cut,” Mr Biden said on April 10 at a White House press conference alongside Japanese Prime Minister Fumio Kishida. Mr Biden said the inflation report could delay a rate cut by at least a month, but he was ultimately unsure how the Fed would act.
A third consecutive month of higher-than-expected inflation data delivered a fresh blow to Mr Biden’s re-election prospects ahead of November’s election, exacerbating concerns voters could punish him over high prices. Higher petrol prices will not help either.
The CPI report revealed ongoing strength in rents, the largest components of the index. Forecasters have long been awaiting a deceleration based on leading indicators, but progress has more or less stalled over the past nine months.
One important caveat: Many of the sources of strength in the March CPI data, like rents and auto insurance, will be more muted in the Fed’s preferred gauge, known as the personal consumption expenditures (PCE) price index. That is because they are weighted less heavily in that report, which comes out later in April.
Still, the numbers were enough to completely reorder bets on the timing of Fed rate cuts.
Before the report, traders were assigning roughly even odds to a first cut in June, according to futures. The chances of such a move dropped to about one in five afterwards, and December is now the first month showing better-than-even odds of a cut.
Chicago Fed president Austan Goolsbee, speaking at an event later on April 10, said policymakers still have a way to go on cooling inflation. He noted that the trade-offs between bringing prices down and keeping employment high are going to be heightened in 2024.
While economists see the core gauge as a better indicator of underlying inflation than the overall CPI, the latter measure climbed 0.4 per cent from the prior month and 3.5 per cent from a year ago, marking an acceleration from February that was boosted by rising energy costs.
A separate report on April 10, combining the inflation data with figures on wages published last week, showed real earnings growth decelerated, rising at the slowest annual pace since May.
Fed officials will see one more PCE report, as well as another look at the producer price index, before their next policy meeting concludes on May 1, though they have already effectively ruled out a rate cut then.
“Even though the Fed doesn’t target CPI, it is another reason for delaying any rate cuts and/or reducing the number expected this year,” said Ms Kathy Jones, Charles Schwab’s chief fixed-income strategist. “If service sector inflation is sticky, then it doesn’t leave much room to ease.” BLOOMBERG
