US inflation came in ahead of expectations for a third consecutive month as the prospect of imminent interest rate cuts looks increasingly remote.
Figures from the Bureau of Labor Statistics showed the consumer price index (CPI) rose 0.4 per cent month-on-month in March. Economists had expected prices to increase 0.3 per cent.
This brought the annual rate of inflation to 3.5 per cent, up from February’s figure of 3.2 per cent and slightly higher than the 3.4 per cent expected by economists.
“The index for shelter rose in March, as did the index for gasoline,” the Bureau said. “Combined, these two indexes contributed over half of the monthly increase in the index for all items.”
Core inflation – which strips out volatile components such as food and energy – remained stuck at 3.8 per cent, after a third consecutive 0.4 per increase on the last month.
The annual figure was unchanged from last month’s figures and also higher than economists expected.
“This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip,” Seema Shah, chief global strategist at Principal Asset Management said.
The figures come amid a growing debate about the timing of the Fed’s first interest rate cuts. Markets have steadily pushed back the timing of the first cut, reflecting stubborn inflation.
Having peaked at over nine per cent in 2022, inflation dropped to three per cent last summer and has remained stuck above that level ever since. Since the turn of this year, it has even shown signs of re-accelerating.
Other indicators also suggest the US economy is still running too hot to allow for rate cuts. Last week figures revealed the US labour market added a staggering 303,000 jobs, well ahead of the 214,000 expected by economists.
All of this has forced markets to reassess the potential timing of the Fed’s first rate cuts. At the beginning of the year, investors were more or less certain that rate cuts would begin in March, with as many as six cuts expected for the year.
Neil Birrell, chief investment officer at Premier Milton Diversified Funds said a June cut looks “less and less likely” as the US economy continues to run at a startling pace.
Paul Ashworth, Chief North America Economist at Capital Economics, went even further, arguing the figures “pretty much kill off hopes of a June rate cut”.
Before the figures were released this morning, markets thought there was just a 50 per cent chance of a rate cut in June. This fell to just 25 per cent after the figures were released.
Some economists, including Minneapolis Fed President Neel Kashkari, have raised the possibility that there will be not be any rate cuts if inflation continues to move sideways.