Another hot inflation reading is sparking concerns among investors that the Federal Reserve might postpone interest rate cuts this year.
The Consumer Price Index (CPI) surged 3.5% over the previous year in March, accelerating from February’s 3.2% annual increase and surpassing economists’ expectations.
The year-over-year change in the “core” CPI, excluding volatile food and energy prices, stood at 3.8%, matching February’s level but exceeding expectations by a tenth of a percent.
Greg Daco, EY’s chief economist, expressed disappointment over the inflation print, acknowledging the increased pressure on policymakers to maintain a higher-for-longer monetary policy stance.
Following the release of the CPI data, the stock market experienced a decline, with the likelihood of a June rate cut from the Fed dwindling. Traders, who previously anticipated a June cut, now foresee an 81% chance of no action in June and a 44% chance of a cut in July. Additionally, the number of projected rate cuts for the year has been reduced to two, below the Fed officials’ median forecast of three.
Atlanta Fed President Raphael Bostic hinted at the possibility of delaying rate cuts further if inflation persists and the economy continues to accelerate. The March CPI report marks the third consecutive month of higher-than-expected inflation, with March’s month-over-month increases in both CPI and core CPI exceeding projections.
The robust start to 2024 has implications for the Federal Reserve, indicating a departure from the consistent downward movement towards the desired 2% inflation target. The pressure to maintain elevated interest rates has intensified, fueled by a stronger-than-anticipated labor market performance in March.
While some Fed officials have voiced concerns about the timing of rate cuts, others have remained steadfast in their predictions. However, the new inflation data has sparked political reactions, underscoring the intersection of the Fed’s rate decisions with the upcoming presidential election.
President Joe Biden highlighted the need to address inflation’s impact on household costs, while former President Donald Trump criticized the Fed’s handling of the situation, alleging motives tied to political agendas.
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