cnn
—
Increase in gas prices and very high mortgages and rents caused inflation to rise more than expected in March, adding to the long and painful battle with high costs. That could force the Federal Reserve to keep its interest rates higher for longer.
Consumer prices in the United States rebounded again last month, reaching a 3.5% increase in the 12 months ended in March, according to the latest Consumer Price Index data released Wednesday by the Bureau of Labor Statistics.
That has increased considerably. from February's 3.2% rate and marks the highest annual profit in the last six months. Wednesday's report further highlights that the road to lower inflation remains extremely bumpy (and continues to be a drag on Americans' hard-earned finances) and that any easing of monetary policy may not happen anytime soon.
President Joe Biden acknowledged Wednesday that there is “more to do” to reduce inflation.
“Today's report shows that inflation has fallen more than 60% from its peak, but we have more to do to reduce costs for working families. Prices remain too high for housing and food, even as prices for key household items like milk and eggs are lower than a year ago,” Biden said in a statement.
Inflation has been a nightmare for Biden's presidency, and voters consistently give him low marks for his handling of the economy.
“You can say goodbye to the June interest rate cut,” wrote Greg McBride, chief financial analyst at Bankrate, in a commentary published Wednesday. Following the release of the report, markets' probability of a rate cut in June sank to 21%, down from 53% on Tuesday and 73% last month, according to the CME FedWatch Tool.
US stocks plunged on Wednesday following the release of hotter-than-expected inflation data, with the blue-chip Dow falling more than 500 points. The S&P 500 lost 1% and the Nasdaq Composite fell 1%.
On a monthly basis, prices were unchanged from February's 0.4% increase.
Gas and housing costs contributed more than half of that monthly increase, but the price increases were widespread, according to the BLS. Aside from prices falling in only a couple of categories (used and new cars, as well as fuel) or holding steady (food at grocery stores), prices rose in virtually every major category last month.
Economists expected a monthly increase of 0.3% and an annual rate of 3.4%, according to FactSet consensus estimates.
The Federal Reserve has wanted to see significant progress on inflation before starting to cut rates.
The pace of price increases slowed noticeably in 2023, but that progress not only hit a roadblock earlier this year, it went backwards.
Since the main index can be heavily influenced by highly volatile categories like food and energy, central bankers often look closely at the “core” index that excludes those categories.
However, the core CPI did not slow down as expected.
Excluding gas and food prices, categories that tend to be more volatile, core inflation rose 0.4% from the previous month, bringing the annual rate to 3.8%, the same reading as February. Economists had forecast a monthly gain of 0.3% and that the annual rate would decline to 3.7%, according to FactSet.
"The headline number was expected to rise due to energy prices, but the fact that the core got hotter than expected is a real bummer," said Tyler Schipper, assistant professor of economics and data analytics at the University of St. Thomas in Minnesota. he told CNN. "That's the number to look at in terms of underlying inflationary trends, and they are very persistent and very stubborn."
On a three-month annualized basis, core inflation is 4.5%, Sarah House, managing director and senior economist at Wells Fargo, told CNN.
The housing component of inflation has proven frustrating to economists and other observers because, although the government's assessment of housing costs - which are time-lagged - remains high, more recent private data sources have shown a cooling in inflation. rentals during the last year.
On an annual basis, the March CPI housing index did not budge from the 5.7% rate seen a month earlier.
"Housing protection was a little firmer, and I think that continues to raise questions about how quickly and to what extent housing inflation can cool in the future," House said.
It's not just housing that keeps utility inflation stagnant. The services index excluding housing continued to outpace overall inflation, increasing 0.5% for the month and 5.3% for the year, according to the report.
Health care services, whose prices fell slightly in February, rebounded 0.6% last month. Auto insurance soared 2.6%, bringing the annual price increase to an unpleasant 22.2%.
"We're still seeing very persistent service inflation," he said. “This is the element that the Federal Reserve has really focused on. “They feel they have better control over the prices of goods and what will happen in the future, but we are not yet seeing the improvement they need in the services sector if we want to continue significantly reducing inflation this year.”
Since pandemic-era supply chain issues were resolved, the goods sector has helped overall inflation decline because prices there have not only slowed but, in some cases, fallen outright.
However, pressures on the supply chain are increasing again due to events such as ongoing turmoil in the Red Sea, The Panama Canal droughtand the collapse of the Key Bridge that blocked the port of Baltimore.
"You're losing that disinflationary momentum in goods while you're still waiting to see more progress in reducing inflation in services," House said.
Economists have long hoped that lower market-rate rents would help reduce housing inflation and overall inflation (the CPI measure of home prices comes with a lag in how the BLS captures data and the natural lag effect of signing annual leases). But there is still hope on the services side, Schipper said.
"Wages are one of the main inputs to services, and they have remained relatively stable and have fallen very well in the labor market," he said. “Hopefully this will start to put some calming pressure on services in the long term.”
Additionally, grocery prices (categorized as “food at home” in the CPI report) remained stable for the second consecutive month and restaurant prices slowed by 4.2% annually, the lowest rate since June 2021.
But even though food prices aren't skyrocketing like they once did, Americans are still feeling the pressure of rising prices from service-related businesses as well as gas pumps.
It will be a “very, very slow process” for inflation to return to a point where consumers don't have to think about it in their daily lives, House said.
"Prices are not going to go back to where they were, so the best we can look for is a moderation in the pace at which prices rise," he said. “You see some stabilization in some key areas like grocery; “But overall, we will still see consumers upset by the current pricing environment for some time.”
This story has been updated with additional developments and context. It also corrects the date of the report, which was issued Wednesday.
