US Consumer Prices Rise Faster than Expected, Signaling Stalled Efforts to Curb Inflation
Consumer prices in the US surged more than anticipated last month, indicating a slowdown in the fight against inflation. According to the US Labor Department, prices increased by 3.5% over the 12 months leading up to March, up from 3.2% in February.
The rise in prices was primarily driven by higher costs for fuel, housing, dining out, and clothing. Analysts caution that the lack of progress in addressing price hikes will likely prompt the US central bank to maintain higher interest rates for an extended period.
Higher interest rates serve to stabilize prices by increasing the cost of borrowing for businesses and other expenditures. In theory, this slows down economic activity, thus alleviating the pressure on prices to rise.
The Federal Reserve’s key interest rate is currently at its highest level in over two decades, ranging from 5.25% to 5.5%. Initially, forecasters anticipated the central bank to commence rate cuts this year, given the significant drop in the inflation rate since reaching 9.1% in 2022.
However, recent economic indicators, including robust job creation figures, have cast doubt on the timing of these rate cuts. This uncertainty led to a decline in Wall Street shares on Wednesday, as investors had anticipated imminent rate reductions.
Analysts, who previously anticipated rate cuts as early as March, have revised their predictions rapidly. Many now foresee rate cuts being delayed until later this summer, with some suggesting they may not occur until next year.
The Federal Reserve’s decision is expected to influence central banks worldwide. Neil Birrell, chief investment officer at Premier Miton Diversified Funds, emphasized the impact of the Fed’s deliberations on global monetary policy.
While inflation subsided considerably in 2023 due to the resolution of pandemic-related supply issues and the waning effects of the Ukraine conflict on food and energy prices, it still exceeds the central bank’s 2% target.
Rising oil prices in recent months have further elevated energy costs, while service prices show little sign of stabilizing. The Labor Department reported a 0.4% increase in prices from March to February, driven primarily by higher petrol and housing costs.
Core inflation, which excludes volatile food and energy prices and is viewed as a better indicator of future trends, remained unchanged at 3.8%, similar to February.
Brian Coulton, chief economist at Fitch Ratings, cautioned against overreacting to the surge in headline inflation, attributing it primarily to energy costs. However, he highlighted that the underlying details are concerning for the Federal Reserve’s policy outlook.
