CPI Report Show Inflation Running Hotter Than Expected

Inflation Data Points to Higher for Longer

The CPI Report shows that for March, a key inflation indicator exceeded expectations, causing concern for Federal Reserve officials who fear their efforts to curb rising prices may be slowing down. This now casts doubts on how soon the Federal Reserve can cut interest rates.

Economists have doubts about the timing and possibility of the Fed reducing interest rates this year due to the unexpectedly high inflation figures. The Consumer Price Index, excluding food and fuel prices, rose by 3.8 percent annually, surpassing economists’ expectations. The core index remained steady at 3.8 percent from the previous month. The monthly reading also exceeded economists’ forecasts.

Incorporating food and fuel costs, the inflation rate rose by 3.5 percent in March compared to the previous year, surpassing the 3.2 percent recorded in February and exceeding economists’ expectations. Increased gas prices played a role in driving up this inflation figure.

Government officials have emphasized their need for more proof that inflation is decreasing before they decide to lower interest rates. The Federal Reserve increased borrowing rates to 5.3 percent by mid-2023, believing this level will have a significant impact on the economy.

In March, policymakers predicted they would decrease interest rates three times within the year. In our view, this may force FED officials to scale this down to two rate cuts for this year.

Thus, the higher for longer scenario being back on the table. It should be noted, that this is the third strong reading in a row leading to a cautious FED that may mean that even a July cut could be too early. Because there is little data released between June and July, then September would be on the table setting the stage that the US election could impact FED decisions.

The ‘Last Mile’ View

The final stage of the Federal Reserve’s fight against inflation would present significant challenges as certain economists on Wall Street who are less optimistic have been cautioning for some time. Mohamed El-Erian, who is the chief economic adviser at Allianz and also the president of Queens’ College, Cambridge, had argued back in the autumn of 2022 that inflation had become deeply embedded in the economy. This meant that, even with increased interest rates, inflation was likely to remain stuck between 3% and 4%.

Initially, this theory seemed to lack credibility. After reaching a 40-year high of 9.1% in June 2022, inflation gradually declined over the following year as the Fed raised interest rates, dropping to a low of 3% by June 2023. However, since then, inflation has remained stagnant in the 3% to 4% range. This is too far from the Fed’s targeted range for them to consider lowering rates in order to stimulate the economy and markets. Furthermore, after two unexpectedly high inflation reports at the beginning of the year, Fed officials have just received more unfavorable news.

Political Implications

Donald Trump immediately went on the offensive criticizing President Joe Biden on the CPI Report with inflation turning hotter. He stated: ‘Inflation is back and raging.’ Then Trump blamed the FED for protecting the worst President ever in US history.

If inflation remains high and the FED cuts later than market expectations, it will be more postitive for Trump in the November election. As we have seen, this reading presented an opening for Trump to call into question Biden’s stewardship over the economy.