The inflation gauge closely monitored by the Federal Reserve remained uncomfortably high in March, likely strengthening the Fed’s stance. reluctance to cut interest rates in the near future, highlighting the challenges facing President Joe Biden’s reelection bid.
Friday’s government report showed prices rose 0.3% from February to March, the same as the previous month. It was the third month in a row that the index rose faster than the Fed’s 2% inflation target. Compared to a year earlier, prices rose 2.7% in March, compared with an annual rise of 2.5% in February.
After peaking at 7.1% in 2022, the Fed’s favorable inflation index has fallen steadily through much of 2023. However, the index has remained above the central bank’s rate target this year. More expensive gasoline and higher prices for restaurant meals, health care, auto repairs and insurance, among other things, are keeping overall price growth rates high.
With new car prices skyrocketing over the past few years, vehicle repair and replacement costs have risen especially quickly. Auto insurance, a major driver of inflation in recent months, rose 8% in March from a year earlier.
Gas prices jumped again last month, up 1.6% from February to March alone, according to government data. Gasoline prices rose even more in April, to a national average of $3.66 per gallon, up from $3.53 a month ago.
However, food prices were unchanged last month, up just 1.5% from a year earlier.
“The Fed won’t like this very much,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “I think it’s clear that they’re going to keep the higher rates longer.”
Like many economists, Sweet doesn’t expect a rate cut until September.
Friday’s inflation data showed that excluding volatile food and energy prices, “core” prices rose 0.3% from February to March, unchanged from the previous month. Compared with a year earlier, benchmark prices rose 2.8% for the second month in a row. The Fed closely monitors benchmark prices, which tend to provide a particularly good indication of the direction inflation is heading.
Chronically elevated inflation readings have been a source of frustration for the Fed, whose policymakers predicted last month that they planned to cut its benchmark rate three times this year. Most economists expected cuts to begin in June. However, more recently, several Fed officials, including Chairman Jerome Powell, made it clear that they have no immediate plans lower the key rate, which will ultimately lead to lower rates on mortgages, car loans, credit cards and many business loans.
“The latest data clearly hasn’t given us any more confidence” that inflation is fully under control. Powell said last weekand “instead, point out that achieving such confidence is likely to take longer than expected.”
“If higher inflation continues,” he added, “we will be able to maintain the current level (of interest rates) for as long as necessary.”
Many economists say they believe the Fed may end up cutting its key rate just once or twice this year, perhaps starting in September. Others say they believe the central bank may not cut its benchmark rate at all in 2024.
One reason why inflation remains stubbornly high is that many Americans are still willing to spend money even at higher prices. Consumer spending jumped 0.8% in March for the second month in a row, well above inflation. Spending data highlighted that even as the U.S. economy slowed in the first three months of 2024, consumer demand remained healthy, suggesting economic growth remains on track.
Sweet said Friday’s data suggested strong consumer spending was the main reason inflation remained stubbornly high through the first three months of this year.
Despite ongoing inflationary pressures, strong growth in jobs and average wages has allowed many American consumers to continue spending at healthy levels, supporting a still robust economy. That helps explain why Fed officials have said they can afford to keep borrowing rates where they are now. The economy has done slowly in the first three months of the yearthe government said on Thursday, but consumers continued to drive growth with continued spending.
Average household incomes, adjusted for inflation, rose 0.2% in March, Friday’s report said. Disposable income after taxes is 1.4% higher than a year earlier, a modest gain, the figures show.
The Fed has raised its benchmark rate 11 times since March 2022 to combat the worst surge in inflation in 40 years. Those rate hikes helped cool inflation sharply—until the decline stopped earlier this year.
Still high prices pose a challenge for the Biden administration, which has sought claim a loan to reduce inflation. The White House points to the unemployment rate, which remained below 4% more than two years, the longest period since the 1960s.
But prices for food, rent, gas and other essentials are still about 20% to 30% higher than they were four years ago, negatively impacting the economy for many Americans. While average wages have also risen since then, many Americans believe they earned more in wages, but higher prices are erasing those gains.
The Fed tends to favor the inflation index the government released Friday, the Personal Consumption Expenditures Price Index, a better-known index. consumer price index. The PCE index attempts to account for changes in how people shop during a surge in inflation. For example, it could reflect when consumers switch from higher-priced national brands to lower-priced stores.
In general, the PCE index tends to show a lower inflation rate than the CPI. That’s partly because rents, which have been high, are weighted twice as much in the consumer price index as they were in the index released Friday.