Inflation rose over the last year, muddying path for Fed rate cuts

“You can kiss a June interest rate cut goodbye," Greg McBride, chief financial analyst at Bankrate wrote in an analyst note. “Inflation came in higher than expected, the lack of progress toward 2 percent is now a trend.”

The main drivers of inflation — housing and energy costs — told a familiar story, and together made up more than half of the month-to-month increase for all of the items that go into the consumer price index. Rent costs rose 0.4 percent in March, a slight improvement over February. But they are still up 5.7 percent compared with a year ago.

The energy index rose 1.1 percent in March, down from the 2.3 percent notched in February, but still up 2.1 percent over last year. Costs for car insurance also contributed to the hot report.

Policymakers will also splice the report for narrower readings that help them gain a sharper sense of how inflation is pulsing through the economy. For example, a key measure that strips out more volatile categories like food and energy rose 0.4 percent in March, as it did for the two previous months. That won’t offer much comfort to officials who are especially focused on parts of the economy where inflation can become stickiest.

Similarly, officials like to compare data month to month — instead of year to year — since the economy can change so quickly. There, too, the Fed saw muted progress, with prices rising at the same rate in March as they did in February.

That’s the latest update for Federal Reserve officials looking for progress in their fight to slow rising prices. The central bank has pushed interest rates to their highest level in 23 years, and officials say they expect to cut rates three times this year. But they also want more data before they act.

So far, the reports haven’t signaled any urgency to bring rates back down. The Fed entered the year bolstered by six months of encouraging data, and notable progress since inflation soared to 40-year highs in the middle of 2022. But prices went in the other direction in January and February, coming in hotter than expected and disrupting the Fed’s remarkable streak of welcome news.

Now the question is whether the start of 2024 simply brought predictable plot twists — or if the Fed is staring down a bigger problem.

At a news conference last month, Fed Chair Jerome H. Powell said the task of getting inflation down to normal levels was always going to be bumpy.

“Now here are some bumps, and the question is, are they more than bumps?” Powell said on March 20. “And we just don’t — we can’t know that. That’s why we are approaching this question carefully.”

But financial markets are also wary that the uncertainty could interfere with cuts this year. Stocks dropped last week after Minneapolis Fed President Neel Kashkari said that while he has cuts in his forecast, that could change if progress stalls.

“That would make me question whether we needed to do those rate cuts at all,” he said.

Over the past few years, inflation has been driven by different factors. First, bungled supply chains sent prices for couches, electronics and more way up. Then historic levels of government stimulus injected a jolt of consumer demand at the same time other parts of the economy — especially service industries like restaurants and hotels — were still hobbling back from the pandemic. After that, Russia’s 2022 invasion of Ukraine roiled global energy markets, sending gas prices over $5 per gallon that summer.

More recently, housing costs have kept inflation high. Plenty of economists argue the official statistics in the consumer price index are delayed and aren’t accounting for real-time measures that show rents falling in many places. But policymakers are still unsure why the shift hasn’t shown up yet. And the hazard is that the longer the shift takes, the harder it will be to wrestle overall inflation down to normal levels.

All of these factors pushed the Fed to raise borrowing costs after inflation spiked. That’s meant to slow the economy by making it more expensive to get a mortgage, take out a car loan or grow a business. And while practically every economist expected that all-out effort to tip the economy into a recession, the opposite has happened, with job growth and consumer spending holding strong, all while inflation generally simmers down.

But it hasn’t returned all the way to normal yet, and Fed officials are quick to caution that victory isn’t guaranteed. The Fed’s target is to get inflation to 2 percent, using its preferred inflation measure. That metric is different from the one released by the Bureau of Labor Statistics on Wednesday, and it clocked in at 2.5 percent in February compared with the year before.

Still, central bankers won’t necessarily wait for inflation to get all the way to their 2 percent target before they trim interest rates for the first time in years. The idea is that there’s been enough progress for officials to gently take their foot off the brake. But policymakers are still looking for total assurance that inflation is moving steadily downward — and will keep at it.

While they wait, central bankers have penciled in three interest rate cuts this year. Financial markets have been setting their sights on a first cut in June. But the odds of that getting pushed back later in the summer — or beyond — grow as officials find themselves waiting for better news month after month.

Speaking to reporters earlier this month, Cleveland Fed President Loretta Mester underscored why it takes time to reach a decision.

“I don’t want to prejudge,” Mester said. “I just need to see more evidence.”