The latest inflation figures have thrown a wrench into hopes for a swift return to price stability. In March, the Consumer Price Index (CPI), a broad measure of economic goods and services costs, rose 0.4% – higher than anticipated. This pushed the annual inflation rate to 3.5%, a 0.3 percentage point increase from February.
Even when we exclude the volatile food and energy components, the core CPI accelerated faster than expected – up 0.4% for the month and 3.8% over the past year. Economists forecasted modest increases of 0.3% and 3.7%, respectively. These figures signal that underlying inflationary pressures remain stubbornly entrenched in the economy.
Economists and TV pundits are not discussing the aggregate inflation rate in the room. I call this the “Elephant Inflation.”
Elephant Inflation
The current rate of 3.5 may not sound bad, but if you look at the chart above from Truflation.com, Americans have faced a 24.5% inflation rate for the last three years! The Fed did manage to dip rates a little over the previous year, but it is back climbing up again.
The Fed is now forced to make the unpopular decision of increasing rates to stop rising inflation or risk a runaway inflation situation. The reality is that government spending is the driving force behind rising inflation.
Housing and Energy Costs Lead to the Charge
The March surge was spearheaded by higher housing costs, which account for roughly one-third of the CPI’s weighting. Shelter costs rose 0.4% on the month and a whopping 5.7% annually. Energy prices also climbed 1.1% after a 2.3% jump in February. These persistently high housing and utility expenses are frustrating the Federal Reserve’s efforts to bring inflation back under control.
While there was a glimmer of relief on the food front, with overall prices up just 0.1% in March and 2.2% year-over-year, certain categories still saw steep increases. Egg prices spiked 4.6%, while meat, poultry, and fish rose 0.9%, illustrating the uneven impact across food items.
Rate Cut Hopes Dashed as Fed Remains Resolute
The hotter-than-expected inflation print has dashed any remaining hopes of the Federal Reserve cutting interest rates in the near future. Markets now see the first rate cut pushed out to September at the earliest as the central bank remains laser-focused on wrestling inflation back under control.
The persistent strength in inflation underscores the challenging road ahead for policymakers. While some categories like used cars are seeing price relief, the stickiness in housing, services, and other core components suggests the disinflationary process still has a long way to go before the Fed can declare victory.
You see, the Fed has been quite clear about their stance. They’ve repeatedly stated that they haven’t seen enough evidence that inflation is on a solid path back to their 2% annual goal. As such, they’ve been preaching patience on cutting rates, expressing caution about the near-term direction for monetary policy.
And this latest CPI report only confirms their worries that inflation is proving stickier than expected. It’s a setback for those who had anticipated the Fed would start cutting interest rates as early as June, with three reductions in total expected this year. But that outlook has now shifted dramatically following the release of these figures.
A Challenging Road Ahead
The persistent inflation strength underscores the challenging road ahead for policymakers. While some categories, like used cars, are seeing price relief, the stickiness in housing, services, and other core components suggests the disinflationary process still has a long way to go before the Fed can declare victory.
As one economist said, “This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip.” They added, “In fact, even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch.”It’s a complex situation, no doubt. However, the Fed seems relentless in its approach, even as the upcoming election season threatens to intrude on its decision-making process.
They understand that restoring price stability is crucial for the economy’s long-term health, even if it means maintaining a hawkish stance for now.
However, as mentioned above, the Fed can only control rates. Government spending is likely to keep up the current pace and may increase if there is an economic downturn. I don’t see an easy way out of this for the Fed.
