The Consumer Price Index (CPI) in the United States rose by 3.5% year-on-year in March, surpassing market expectations. Previously, analysts had anticipated a 3.4% increase in the CPI for the same period.
Excluding the volatile food and energy components, the core CPI increased by 0.4% on a monthly basis and by 3.8% year-on-year, higher than the earlier estimates of 0.3% and 3.7%, respectively. Following the data release, the yield on the US 2-year Treasury note surged by 13 basis points to 4.88%.
This news spells trouble for consumers, market participants, and Federal Reserve officials, who had hoped for a slower pace of price increases to enable gradual interest rate cuts later this year.
The Consumer Price Index measures the cost of a basket of goods and services in the $27.4 trillion US economy. It was expected that all components of the index, as well as the core index excluding food and energy volatility, would rise by 0.3%.
Dan North, Chief Economist at Allianz Trade North America, remarked, “We’re not hitting that target quickly enough, or convincingly enough, and I think this report shows that.”
Federal Reserve Chair Jerome Powell recently stated that despite strong economic performance, rate cuts remain a possibility this year. He specifically noted that better-than-expected inflation data for January and February did not alter the Fed’s policy outlook. However, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, expressed skepticism about the need for rate cuts if inflation remains sticky, stating, “I would question whether we need to cut rates.” This underscores the importance of closely monitoring inflation data, particularly in light of recent increases in crude oil prices.
Other key US economic data to watch include the Producer Price Index (PPI) and weekly initial jobless claims, set to be released on Thursday, as well as the preliminary April Consumer Sentiment Index from the University of Michigan, scheduled for release on Friday. These data points should provide a clearer picture of the health of the US economy.
According to data from the US Department of Labor released last Friday, the economy added 303,000 jobs in March, surpassing February’s 270,000 and expectations of 200,000. Strong sectors such as healthcare and government continued to drive job growth, but cyclically sensitive industries like construction, retail trade, and leisure and hospitality also saw gains.
While such robust data may not provide a compelling case for the Fed to cut rates quickly, the report does offer some points for inflation doves to highlight. It indicates a downward momentum in inflation, keeping the Fed’s path seemingly open. However, if the stubborn, sluggish anti-inflation trend seen in January and February persists for another month, it could be painful for investors, as evidenced by this week’s stock market sell-off.