The latest overall inflation data from the US economy tells a confusing story. The Federal Reserve is trying to thread an incredibly fine needle with their cautious approach to any prospective interest rate cuts. That’s because in March overall consumer prices were up only 2.4% from a year ago. That is down from the 2.8% increase recorded in February. Several factors have contributed to this most recent slowdown in inflation, such as strong disinflationary pressures and persistent economic uncertainty.
After leading the pack, transportation inflation took a sharp turn last March. It increased at a much more moderate rate of 3.1% y/y, down from 2.6% in February. Month-on-month inflation came in at 0.1% in March, down from 0.2% in February and well short of analysts’ forecasts of 0.3%. The recent dive for fuel oil prices was considerable, as they were down 7.6% from last year at this time. That drop comes on the heels of a 5.1% drop from the previous month.
Economic Indicators Reflect Caution
The latest inflation numbers should be a reminder of a longer-term trend toward disinflationary pressures in the economy. While consumer inflation has been well-behaved. Core prices, which strip out volatile food and fuel costs, rose 2.8% from a year earlier, down from 3.1% in February. This overall drop will likely affect the Federal Reserve’s calculations for whether to raise interest rates in the future.
Food inflation is on the up, climbing to 3% y-o-y in March, up from 2.6% in February. These will likely be the developments most closely examined by analysts, as they’re a sign of shifting consumer habits and a reflection of the rising costs of critical goods.
Even with these changes, much economic uncertainty remains. For example, the Federal Reserve’s most recent minutes warn of upside risks to inflation. CJ Cowan, a portfolio manager at Quilter Investors, discussed what this uncertainty means for monetary policy.
“Federal Reserve minutes yesterday indicated concern about upside inflation risks, and over the past few days it has become increasingly clear that the Fed won’t pre-emptively cut interest rates but instead they would need to see more significant weakening in the labour market first.” – CJ Cowan, portfolio manager at Quilter Investors.
Future Implications for Monetary Policy
As the Federal Reserve deliberates its next move, analysts predict a move cautiously towards rate cuts. Moderate month-on-month inflation coupled with accelerating core inflation would raise pressure on the central bank to delay any significant alteration to interest rate policy. They’ll want to see more convincing signs of economic softening before making the move.
Relying on inflation figures Cowan emphasized, can be outdated within the hour you’re putting them out. This largely stems from the rapid pace of tariff announcements and other key economic indicators.
“Much like the employment report on Friday, the latest US inflation figures can already be considered as stale on release after the exhausting back and forth of tariff announcements,” – CJ Cowan, portfolio manager at Quilter Investors.
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