The March CPI reading came in hotter than expected. This marks the third consecutive strong reading and suggests that the stalled disinflationary narrative can no longer be called a blip. Today’s crucial CPI print has likely sealed the fate for the June FOMC meeting, with a policy rate cut now very unlikely.

Report details:

  • Monthly headline inflation rose 0.4% in March, faster than the 0.3% consensus expectation. As a result, annual headline inflation rose from 3.2% to 3.5%. Monthly core inflation remained at 0.4% for the third consecutive month. As a result, annual core inflation failed to decline, remaining unchanged at 3.8%.
  • Energy prices rose 1.1% on a month-over-month basis in March, driving headline inflation higher for the second consecutive month. On a year-over-year basis, energy inflation has now turned positive for the first time since February 2023, reversing the deflationary trend that helped lower headline numbers last year. Higher oil prices, with Brent crude near $90 per barrel, have contributed to these price pressures. In particular, gasoline and electricity prices have risen 1.3% and 5%, respectively, over the past twelve months.
  • Shelter inflation has remained high, defying hopes among Fed officials that these price pressures would begin to ease. In March, shelter costs increased 0.4% month-over-month or 5.7% year-over-year, contributing greatly to both core and headline inflation. Core inflation excluding shelter prices has risen just 2.4% over the past year. Similarly, transportation services costs also contributed to core inflation with an increase of 10.7% year-over-year due to higher insurance and maintenance and repair costs.
  • Core goods prices fell for the fourth time in five months in March, leading to a year-over-year deflationary decline of -0.7%. Subdued core goods inflation has helped to prevent a resurgence in overall inflation in recent months. In contrast, core services inflation remains hot. Core services prices have increased 5.4% from a year ago and contributed 3.1 percentage points to overall headline inflation in March.

The past few months have been a particularly volatile period for Federal Reserve forecasts. Upside inflation surprises mean that financial market expectations have shifted from six Fed cuts this year to just two cuts, starting in September. For the first time this year, markets are expecting fewer cuts than the Fed’s own projection.

The strength of the economy means that only one cut is likely required, yet we must take consideration of the Fed’s clear desire to reduce rates into account. We have revised our forecast from three cuts to two cuts in 2024, with the first reduction coming in September. The complications of starting an easing cycle just before the U.S. Presidential election does, however, insert significant uncertainty to the forecast.


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