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Two bad months are a concern, but three months make a trend. And it’s not the trend the Federal Reserve wants. The consumer price index (CPI) rose more than expected in March, surpassing estimates and prior levels. The Fed had been hoping the elevated levels in January and February would prove to be a seasonal aberration that would correct itself in March. However, three months of a 0.4% increase in core CPI means only one thing – inflation is now officially sticky and will take longer to move to 2% than it did to move away from 4%. The monthly rises of 0.4% are the highest monthly levels in almost a year and effectively erase what was considered to be cooling inflation. Year-over-year headline CPI increased 3.5%, the highest level in six months.
Of course, it is easy to point to the culprits in the index causing the re-emergence of inflation as a way to shrug off its increase. But it’s difficult to continue ignoring the warning signs. Shelter and gasoline prices accounted for over half of the monthly rise in March. Shelter prices have been expected to ease but are simply not easing as fast as hoped. Services ex-housing, a category which includes everything from medical care to auto insurance, continues to be a problem. This is the category that troubles the Fed the most and lends to the stickiness of price pressures. There were areas of improvement, namely new and used auto prices, but not enough to suggest the fight against inflation is over.
The producer price index (PPI), considered to be a forecast of where prices are headed, shed some relief on the inflation story. The monthly level of inflation rose at a much smaller pace than in past months, even though the year-over-year rise was above 2% for the first time in 11 months. From the Fed’s point of view, much of what goes into the Fed-favored Personal Consumption Expenditure (PCE) inflation index comes from PPI which allows a little more breathing room for Powell & Co. In any event, the Fed is right to remain cautious before cutting rates.
KEY INDICATORS THIS WEEK
FOMC Minutes – The March FOMC minutes underscored officials’ reluctance to lower rates until they have more evidence inflation is firmly on a path to 2%. This week’s latest inflation reports, coming three weeks after the meeting, did nothing to remove the reluctance. While “almost all” officials judged it would be appropriate to begin lowering borrowing costs “at some point” this year, three months of higher-than-expected inflation data is likely to keep the Fed waiting longer to make a move. Policymakers “noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven.” Fed officials had been hoping the January and February inflation readings would prove to be temporary blips. Now that we have the March data, the temporary blip is losing steam. At this point, the financial markets and likely the Fed have pushed bets for the first cut until after summer.
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