- The US consumer price index (CPI) climbed 3.5% year-on-year in March, up from 3.2% in February and above the market estimate of 3.4%. This was the highest inflation rate since September.
On a monthly basis, CPI remained unchanged in March at 0.4%, higher than the market estimate of 0.4%. The increase in inflation was mainly due to rising energy and shelter costs.
Core CPI, which excludes food and energy and is closely watched byn the Federal Reserve, was unchanged at 3.8% in March and just above the market estimate of 3.7%. Higher shelter costs were responsible for most of the increase. Monthly, core CPI rose 0.4%, matching the previous two months and above the market forecast of 0.3%.
US inflation has accelerated for a second straight month, a reminder that although inflation appears under control, the final sprint to the 2% target will be a challenge for the Federal Reserve.
The Fed would like to provide relief to consumers and businesses by lowering interest rates, but there are two reasons why an initial rate cut is not around the corner. First, inflation has remained persistently high and has moved higher over the past two months. The Fed does not want to lose more ground in the battle with inflation, and lowering rates too early could see inflation rise further and force the Fed to raise rates.
Second, the US economy has been surprisingly resilient despite the steep rise in rates, with last week’s blowout nonfarm payrolls the latest example. The Fed needs the economy to cool if inflation is to be brought down to 2%, which means that it will have to prolong its “higher for longer” stance until the economy shows signs of slowing down.
The markets have lowered expectations of a rate cut in June or July due to the strong inflation report and have not fully priced a rate cut until September.
The inflation report means that the Fed is likely to push off a rate cut, which has sent the US dollar sharply higher, and the US stock markets considerably lower, within the first few hours following the data release.
The US dollar has posted strong gains against all the major currencies in the aftermath of today’s inflation release. The EUR/USD currency pair is down 0.86% and the GBP/USD currency pair has declined 0.72%. The AUD/USD currency pair has been hit especially hard and is down 1.47%.
The US stock markets are lower following today’s inflation report. The Nasdaq 100 Index is down 182 points (1.01%) at 17,984 and the S&P 500 Index has dropped 60 points (1.13%) at 5151 in early trading on Wednesday.