Higher consumer prices keep US inflation elevated, likely delaying Fed rate cuts

Consumer inflation remained persistently high last month, boosted by gas, rents, auto insurance and other items, the United States government said Wednesday in a report that will likely give pause to the Federal Reserve as it considers how often – or even whether – to cut interest rates this year.

Prices outside the volatile food and energy categories rose 0.4 per cent from February to March, the same accelerated pace as in the previous month. Measured from a year earlier, these core prices are up 3.8 per cent, unchanged from the year-over-year rise in February. The Fed closely tracks core prices because they tend to provide a good read of where inflation is headed.

Wednesday’s figures represent a disappointment for the White House. Republican critics of US President Joe Biden have sough to pin the blame for high prices on the president and use it as a cudgel to derail his re-election bid. Polls show that despite a healthy job market, a near-record-high stock market and a decline inflation from its peak, many Americans blame Biden for high prices.

The March figures, the third straight month of inflation readings well above the Fed’s 2 per cent target, provide concerning evidence that inflation is stuck at an elevated level after having steadily dropped in the second half of 2023. The latest numbers threaten to torpedo the prospect of multiple rate cuts this year. Fed officials have made clear that with the economy healthy, they’re in no rush to cut their benchmark rate despite their earlier projections that they would do so three times this year.

The report “pours cold water on the view that the faster readings in January and February simply represented the start of new-year price increases that were not likely to persist,” Kathy Bostjancic, chief economist at Nationwide, said in a research note. “The lack of moderation in inflation will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2 per cent and likely delays rate cuts to September at the earliest and could push off rate reductions to next year.”

On Wall Street, traders sent stock prices tumbling and bond yields rising, reflecting fear that the Fed may delay interest rate cuts indefinitely.

Chair Jerome Powell has stressed that the Fed’s policymakers need more confidence that inflation is steadily slowing to their target level before they will support a rate cut. Lower rates could fuel faster growth and potentially push inflation higher. Powell’s stance has elevated the profile of the monthly inflation data in determining when the Fed might start cutting rates. Lower rates would lead, over time, to reduced borrowing costs for businesses and consumers.

Overall consumer prices rose 0.4 per cent from February to March, the same as in the previous month. Compared with a year ago, prices rose 3.5 per cent, up from a year-over-year figure of 3.2 per cent in February.

The Fed closely tracks a separate inflation gauge that has been coming in below the consumer price index, released Wednesday. Yet those figures will likely come in high enough to concern policymakers.

The persistence of elevated US inflation complicates Biden’s claims to be making steady progress against higher prices. The president has argued that further improvement would be possible if Republicans in Congress would back his policies.

“My agenda is lowering costs for prescription drugs, health care, student debt and hidden junk fees,” Biden said in a statement.

The costs of owning a vehicle were a key reason why prices jumped last month: Auto insurance surged 2.6 per cent in March and are up a dramatic 22 per cent from a year ago. That increase reflects, in part, the rise in new-car prices over the past two years.

Clothing costs jumped 0.7 per cent in March, the second straight month of sizable increases, though they have barely risen over the past year. Grocery prices, though, were unchanged last month and are just 1.2 per cent higher than they were a year ago, providing some relief to consumers after the huge spikes in food prices in the previous two years.

Inflation has plummeted from its peak of 9.1 per cent in June 2022.

AP