The March consumer price index (CPI) report came in even hotter than expected on Wednesday, raising concerns that the Federal Reserve may not be finished raising rates after all.
What does the CPI mean for the central bank’s trajectory this year?
Well, at the very least, it likely confirmed that the Fed won’t cut rates until well into the second half of the year, if at all. The CPI jumped 0.4% in March, rising at a rate of 3.5% over the past 12 months. This is notably hotter than even liberal projections of a 0.3% gain and a 3.4% annual rate. It’s also well above February’s 3.2% inflation level, which itself was a jump from January’s 3.1% reading.
The core CPI also came in hot, climbing 0.4% month-over-month, putting the annual rate at 3.8%, both slightly higher than previous forecasts.
Shelter costs, which make up roughly a third of the weighting in the CPI, jumped 0.4% in March, accelerating to an inflation rate of 5.7% year-over-year (YOY). This is perhaps the most troubling aspect of the report, as the Fed has long maintained expectations that shelter costs will slow down through the year, helping inflation cool to a level permitting rate cuts.
Otherwise the report was relatively uninteresting. Food prices climbed 0.1% on the month, while Used Vehicle prices actually fell 1.1% in March, from a monthly gain of 0.5% in February.
Wall Street Abuzz Over CPI Report
With inflation clearly going the wrong way, analyst and economists alike continue to speculate over the potential monetary implications.
“Today’s inflation data surprised to the upside for the third month in a row with both headline and core CPI coming in at 0.4% for the month of March. Looking at the details, the stickiness was broad based and certainly not welcomed by the Fed, who has initially signaled intentions of commencing rate cuts this year,” noted Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. “The next potential opportunity for a rate cut is likely not going to be until after the summer and given the trajectory of the economy, the uncertainty around monetary policy is going to remain high for the foreseeable future.”
The S&P 500 slipped nearly 1% on Wednesday following the report, as evidence builds that the Fed will remain hawkish heading into the May policy meeting.
Indeed, at the time of this writing, the CME FedWatch Tool prices in just a 2.5% chance of a rate cut in May and just a 20.5% chance of a cut in June. These numbers have dwindled in the face of unflattering economic data, like this week’s CPI and the recently released March jobs report.
If you recall, the U.S. economy added a staggering 303,000 jobs in March, about 100,000 more than projected. This gave the Fed further license to keep rates elevated with no immediate concern of economic blowback.
Will the Fed Hike Interest Rates?
With inflation proving more stubborn than anticipated, some economists have even started tossing around the idea that the Fed may raise interest rates again.
This includes Fed Governor Michelle Bowman, who suggested just such a possibility last Friday.
“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” Bowman said. “Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2% over the longer run.”
The recent report only strengthens the case for a late-cycle hike. However, as Bowman mentioned, this doesn’t appear to be the base case for most economists.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
