Beware, Fed: Inflation in the US accelerates to 3.5% in March, more than analysts expected

A US key price indicator beat forecasts for the third straight month due to gains in rents and transportation costs, raising concerns that inflation is taking hold as the economy continues to advance.

The so-called core consumer price index (CPI), which excludes food and energy costs, rose 0.4 percent since February, according to government data released Wednesday. The underlying year-on-year rate was unchanged at 3.8 percent, defying expectations of a rebound. The general interannual CPI stood at 3.5 percent.

Analysts consider that the underlying indicator is the most representative measure of inflation, even more than the general CPI, which stood at 3.5 percent year-on-year in March, with an increase compared to the February figure.

The financial markets were shaken by the figures, which ignited the dollar and Treasury bond yields They caused the stock market to crash. Along with recent reports showing that the labor market and economic activity have also been stronger than expected, Investors no longer see much chance that the Fed will feel the need to start easing in the short term.

“The sound that was heard there was the slamming of a rate cut in June. That's gone,” David Kelly, chief global strategist at JPMorgan Asset Management, said on Bloomberg Television.

Wednesday's Bureau of Labor Statistics report revealed the continued strength of rents, the most important components of the CPI. Forecasters have long been expecting a slowdown based on leading indicators, but progress has more or less stalled over the past nine months.

Meanwhile, services inflation accelerated, largely thanks to transportation-related categories such as auto insurance and repairs, as well as healthcare. Core asset prices were a bright spot, resuming a downward trend that helped fuel disinflation in the second half of 2023.

One important caveat: Many of the sources of strength in the March CPI data, such as rents and auto insurance, will be more subdued in the Fed's preferred gauge, known as the personal consumption expenditures price index. This is because they are given less weight in that report, which will be published later this month.

Still, the numbers were enough to completely reorder bets on the timing of the Fed's rate cuts. Before the report, traders assigned roughly equal odds to a first cut in June, based on futures. The chances of such a move dropped to about one in five afterwards, and December is now the first month to show odds better than the odds of a cut.

This is what Bloomberg Economics says about inflation in the US

“The Fed is likely to get a stronger signal that disinflation momentum is slowing from this report. We push back our expectation of a first rate cut to July, from our previous June baseline,” noted Anna Wong and Stuart Paul.

Higher interest rates for longer can pose new challenges to President Joe Biden's re-election campaign. Higher gas prices won't help either.

While economists consider the core gauge to be a better indicator of underlying inflation than the headline CPI, the latter measure rose 0.4 percent from the previous month and 3.5 percent from a year ago, marking a acceleration since February driven by rising energy costs.

A separate report on Wednesday, combining inflation data with wage figures released last week, showed real earnings growth slowed, rising at the slowest annual pace since May.

Fed officials will see one more PCE report, as well as another look at the producer price index, before their next policy meeting concludes on May 1, although they have already effectively ruled out a rate cut then.

“Even though the Fed is not targeting the CPI, it is another reason to delay any rate cuts and/or reduce the number expected this year,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “If service sector inflation is sticky, then it doesn't leave much room to decline.”