Driven by energy and housing inflation, the U.S. core CPI has been higher than expected for the third consecutive month, which may delay the timing and extent of the Federal Reserve's interest rate cuts this year.
On Wednesday, April 10, data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI increased by 3.5% year-on-year in March, higher than the expected 3.4%, and also higher than the previous value of 3.2%. The U.S. CPI increased by 0.4% month-on-month in March, exceeding expectations of 0.3% and remaining unchanged from the previous value.
The Fed is more concerned about core inflation, which excludes food and energy costs. The U.S. core CPI increased by 3.8% year-on-year in March, higher than the expected 3.7% and unchanged from the previous value. Core CPI increased by 0.4% month-on-month in March, which was higher than the expected 0.3%. It was also unchanged from the previous value. It was also 0.4% in January, both exceeding expectations for the third consecutive month.
The three-month core CPI annualized rate rose from 4.1% to 4.5%, the largest increase since May last year.
In the core index, the cost of goods continues to fall year-on-year, but services are re-accelerating. So-called super core inflation, the core CPI services index surged 0.7% month-on-month and 5.0% year-on-year, the highest since April 2023. Every component of super core inflation rose both quarter-on-quarter and year-over-year.
After the data was released, the U.S. dollar index surged by about 50 points in the short term, temporarily trading at 104.53. The yen hit 152 against the dollar for the first time in 34 years and for the first time since July 1990. Spot gold fell more than $15 in the short term, temporarily trading at $2,332.07 an ounce.
Energy and housing costs soared, contributing more than 50% of the increase
Looking at the breakdown of items, gasoline and housing expenses soared, contributing more than 50% of the increase. Car insurance, medical and clothing expenses also increased, while new and used car prices fell. From a comparison perspective:
The energy index rose 1.1% this month, the gasoline index rose 1.7%, the electricity index rose 0.9%, and the fuel index fell 1.3%.
Housing prices, the largest category in the services sector, rose 0.4% for the second month in a row, as did the owner-equivalent rent index, which rose 0.4%, and the accommodation away from home index, which increased 0.1% as in February.
The motor vehicle insurance index accelerated by 2.6% in March after rising 0.9% in February; the clothing index rose by 0.7%, and the health care index rose by 0.5%.
The used car and truck index fell 1.1% in March after rising 0.5% in February. The entertainment index fell by 0.1% month-on-month, the new car index fell by 0.2% month-on-month, and the aviation fare index fell by 0.4% month-on-month.
Previously, research models from some foreign-funded institutions showed that leading indicators of rent prices have begun to decline. If the OER growth rate in March is lower than 0.42%, this may be an important signal that the OER has begun to slow down, which will help alleviate core inflation pressure. Now it seems Owner equivalent rent (OER) remains sticky.
Interest rate cut expectations fall again
U.S. Treasury yields surged to new highs for the year as data showed consumer prices rose more than expected in March, prompting investors to abandon bets that the Federal Reserve would cut interest rates more than twice this year.
Evidence that progress in curbing inflation has stalled was interpreted as making it unlikely that the Fed would cut interest rates three times before the end of the year, as was the median forecast at its March policy meeting. Strong March employment data released last week has weakened market confidence in three interest rate cuts.
Swaps contracts anticipating Fed decisions have repriced to indicate higher interest rates in the future. The December contract reached around 4.85%, less than 50 basis points below the effective federal funds rate of 5.33%.
Oliver Pursche, senior vice president at Wealthspire Advisors, said:
The inflation report confirmed the Fed's concerns that a stronger-than-expected economy could lead to a rise in inflation this spring and summer, undoubtedly delaying interest rate cuts. I think a rate cut in July is still possible. There will be a few key numbers before then, but it would surprise me if the Fed cuts rates in June, or if it cuts rates more than twice this year.
Kenneth Mahoney, president of Mahoney Asset Management, said:
The fiery inflation report is sure to hamper the Fed's actions. So far, every part of this report is hotter than expected. Rising oil and natural gas prices over the past month have also been linked to this. There is no reason for the Fed to cut rates while we are still fighting inflation. Most investors will rule out a rate cut in June.
Policymakers will have another PCE report, as well as another report on the Producer Price Index, before the next policy meeting in May, where Fed officials have effectively ruled out a rate cut.