US inflation came in higher-than-expected in March, likely pushing the Fed’s pivot somewhere after the summer.
US inflation in March was stickier than expected, rising 0.4% month-on-month and 3.5% in the year-ago period. The data was released on Wednesday, marking the most important economic data coming out this month, and likely this entire year so far.
The American Consumer Price Index (CPI) is a key indicator of inflation, marking the monthly and annual price differences for US consumers. Markets widely expected a 0.3% monthly and a 3.4% increase. February’s reading showed inflation growing 3.4% year-on-year.
Energy prices increased 1.1% yearly after growing 2.3% in February. April’s energy prices may edge up even further given the recent increases in global oil prices.
Core inflation, a measure of price differences that excludes volatile goods like food and energy, rose 0.4% for the month and 3.8% for the year. Markets expected a 0.3% and 3.7% increase respectively. February’s reading showed a 3.7% annual increase instead.
Inflation has been a persistent problem for the United States since the COVID-19 pandemic, later exacerbated by wars in Ukraine and the Middle East. At its peak, US CPI almost touched the 10% level.
The Federal Reserve, however, aims at an annual CPI increase of 2%. March’s increase deals a blow to the Fed’s strategy and could have far-reaching effects on the entire global economy.
Inflation, rates, and politics
The Fed raised interest rates to 5.5% in one of its most aggressive tightening policies ever. Since mid-2023, the Fed left rates unchanged, waiting for inflation to slowly come down to target.
At the beginning of 2024, markets expected at least three rate cuts this year. Fed’s Chairman Jerome Powell himself fueled these hopes, saying cuts were likely coming soon. Wall Street forecast the first cut (formally known as a “pivot”) already in June.
But March’s inflation puts an end to these optimistic hopes. June cuts are now considered extremely unlikely, and even July appears too close for caution.
Powell always said the Fed would wait for inflation to be on a stable path downward, which is clearly not the case.
But rising inflation is also a blow to incumbent President Joe Biden, who is seeking reelection in November 2024. Republican candidate Donald Trump blasted Biden’s handling of inflation following Wednesday’s reading.
“But look,” Biden said at a conference on Wednesday, “we have dramatically reduced inflation from 9 percent down to close to 3 percent. We’re in a situation where we’re better situated than we were when we took office, where inflation was skyrocketing.”
His chances of reelection, however, will also depend on when the Federal Reserve decides to start cutting rates. Biden said the recent inflation reading may “delay” a pivot, but he still believes it will come sometime this year.
