Inflation came in hot at 3.5% in March, CPI report shows. Fed could delay rate cuts.

Inflation ran hot for a third straight month in March, raising questions about when the Federal Reserve will feel confident that price pressures are subdued and it can begin cutting interest rates.

Overall prices increased 3.5% from a year earlier, up from 3.2% in February, driven largely by the rising cost of rent and gasoline, according to the Labor Department’s consumer price index. On a monthly basis, costs rose 0.4%, similar to the previous month.

What is core inflation right now?

Core prices, which exclude volatile food and energy items and are watched more closely by the Fed, increased 0.4% in line with February's rise. That kept the annual increase at 3.8%.

Is inflation really going down?

Since reaching a 40-year high of 9.1% in June 2022, inflation has slowed dramatically. But after rapid improvement in the fall, price increases have accelerated on a monthly basis to a range of 0.3% to 0.4% so far this year.

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Products such as used cars, furniture and appliances have gotten less expensive as pandemic-induced supply bottlenecks have unwound, though goods prices jumped in February. But the cost of services such as rent, car insurance and transportation keep rising, in part, because pandemic-related pay increases have slowed only gradually as worker shortages have eased.

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Barclays expects the monthly price gains to slowly moderate, bringing down yearly inflation to 3% and core price increases to 3.1% by the end of the year – still well above the Fed’s 2% goal.

Are interest rates going down in 2024?

In recent weeks, Fed Chair Jerome Powell has said the uptick in prices in the first two months of the year could have been a blip and inflation is still heading toward the 2% target “on a sometimes bumpy path.”

But the larger-than-expected rise in March could set off more worries that market-friendly interest rate cuts will be pushed back, especially with the economy and labor market performing so robustly recently.  

The futures market is now betting the Fed's first rate cut will be pushed back to September, with the Fed lowering rates just twice this year. It had been predicting the first cut in June and a total of three decreases in 2024, in line with Fed officials' median estimate last month.

In a note to clients Wednesday, economist Paul Ashworth of Capital Economics wrote, "The third consecutive 0.4% (monthly) rise in core CPI pretty much kills off hopes of a June rate cut."

And Kathy Bostjancic, Nationwide's chief economist, said the report "will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2% and likely delays rate cuts to September at the earliest and could push off rate reductions to next year.”

Since March 2022, the Fed has hiked its benchmark short-term rate from near zero to a 22-year high of 5% to 5.25% to tame inflation, though officials have paused since July. Higher rates increase consumer and business borrowing costs and tend to curtail economic activity.

What is the US stock market doing right now?

Stock prices weakened in response to the higher inflation rate. As of 10:45 a.m. EDT, the S&P 500 fell 0.73% and the Dow Jones Industrial Average slipped 0.84% as investors grew concerned that expected interest-rate cuts may come later than hoped. Prices for 10-year Treasury bonds, which are sensitive to inflation, fell and pushed up their yields to 3.1%.

Inflation is shaping up a key issue in the presidential election. President Joe Biden said in a statement that the latest numbers show that while inflation has fallen more than 60% from its peak, more still must be done to lower costs.

“Prices are still too high for housing and groceries, even as prices for key household items like milk and eggs are lower than a year ago," Biden said.

What is the reason for gas prices rising again?

Gasoline prices rose 1.7% in March, the second increase after four straight monthly declines. The Russia-Ukraine war has constrained Russian crude oil supplies. And demand is picking up as the spring driving season gears up and producers are switching to more expensive summer blends.

Will rent go down in 2024?

Together, the cost of housing and gas accounted for more than half the monthly increase in overall prices

Rent increased 0.4% in March, easing slightly from the prior month but the latest in a flurry of hefty gains. That nudged down the annual rise to a still elevated 5.7% from 5.8%. Economists expect rent increases to moderate, based on new leases, but that has filtered through just gradually to existing leases.

The cost of some other services also kept drifting higher. Medical care increased 0.6%; car repairs, 1.7%; and auto insurance, 2.6%. Airfares, though slipped 0.4% on falling jet fuel prices.

More encouraging: Some goods prices dropped, with used cars falling 1.1%, new vehicles edging down 0.2% and appliances dipping 0.7%. Apparel prices, though, rose 0.7% and furniture increased 0.3%.

Are food prices going up or down?

Grocery prices were unchanged for a second month, nudging up the annual increase to a still modest 1.2% and providing consumers continued relief from big price gains during the pandemic.  

Breakfast cereal prices fell 1.6%, bread slid 0.9% and cookies dropped 1.2%.

But proteins generally climbed. The cost of uncooked ground beef increased by 0.7%, bacon jumped by 0.9% and eggs surged by 4.6% amid another bird flu outbreak.

Contributing: Michael Collins