The United States has experienced a higher-than-expected inflation rate for the third consecutive month, primarily driven by increased rents and transportation costs. The core consumer price index, a key measure of inflation that excludes volatile food and energy prices, rose by 0.4% from February, maintaining an annual rate of 3.8%. This index provides a more accurate picture of the inflation trend, as it eliminates the impact of temporary price fluctuations, such as those caused by changes in food and energy prices.
Service inflation has accelerated mainly due to transport-related categories such as insurance, car repairs, and healthcare. Basic goods prices have been a positive point, reversing a downward trend that helped stimulate disinflation in the second half of 2023.
While economists consider the core indicator a better gauge of underlying inflation, the overall CPI rose by 0.4% month-on-month and 3.5% year-on-year, marking an acceleration from February, driven by rising energy costs. Even though the Fed does not target the CPI, it’s another argument for delaying rate cuts.
These figures shook Financial markets, which ignited dollar and Treasury yields and caused stock markets to fall. Coupled with recent reports showing that the labour market and economic activity have also been stronger than expected, investors no longer see much chance of the Fed feeling the need to begin easing its policy in the near future. The latest US unemployment figures showed no deterioration. In both the public and private sectors, wages increased roughly the same as last year. These better-than-expected figures suggest that the sharp rise in interest rates has had little effect on the labour market. In summary, a rate cut in June is no longer on the table.
The most worrying aspect is that the data do not take into account the recent increase in energy costs, which will likely ripple into next month’s production prices and potentially consumer prices.
If the Fed maintains high rates for longer, it becomes more difficult for other central banks to reduce their rates without weakening their currencies against the dollar. In the Euro area, the situation is different. Growth is atone, and inflation is decreasing. There is a strong likelihood that the European Central Bank will implement at least a 25 basis point rate cut more than the Fed this year, with a process that will start in June. This will be uncomfortable for the ECB. As a result, the dollar is expected to strengthen.