CIO Notebook: March Inflation Comes in Like a Lion

April 10, 2024

The start to 2024 has been bumpy in terms of the progress necessary to move away from the Fed’s restrictive monetary policy.

U.S. CPI data was released today for March and was hotter than expected for the fifth month in a row, a troubling trend for the Federal Reserve (Fed) looking to ease policy this year. Headline CPI was up +0.4% month-over-month and up +3.5% year-over-year versus expectations of +0.3% and +3.4%, respectively. Core CPI was up +0.4% on a month-over-month basis and up +3.8% on a year-over-year basis compared with a consensus expectation of +0.3% and +3.7%, respectively.

Similar to February’s report, shelter and gasoline drove over half of the increase in headline inflation for the month. Looking more closely at the shelter component, month-over-month price increases back through September 2023 have not fallen below +0.3% and appear anchored close to +0.4%, yielding a year-over-year increase of +5.7%.

Despite stagnant natural gas prices, energy prices rose by +1.1% in the month of March, compounding an increase of +2.3% in February. In our view, this re-acceleration of energy costs after several months of declines is worrisome at this point in the cycle, not only because it casts doubt on the overall disinflationary trend, but that it could be both reflective of the effects of improving cyclical output and that it could also weigh on consumer confidence as we move into the summer travel season.

The increase in core CPI on a month-over-month basis was also attributable in large part to the shelter component, but also in broader parts of the consumer basket: apparel, furniture, medical care, education and, once again, car insurance, which is now up over +22% on a year-over-year basis. While shelter has been the main culprit in terms of driving the stickiness of core CPI as of late, services outside of shelter have re-accelerated meaningfully over the last two months, posting increases of +3.9% and +4.8% year-over-year, respectively, in February and March.

The news was not all bad, however, as food costs and, more importantly, food at home costs have flattened out and both new car and used car costs were lower in the month; both are now lower on a year-over-year basis as well. Food and cars reflect non-discretionary spend for most American consumers, and economists and politicians alike in Washington D.C. will be looking at these measures as bright spots in an otherwise challenging release.

In terms of the potential Fed reaction, we believe it is important to remember that the Fed’s preferred measure of inflation is the Personal Consumption Expenditures Price Index (PCE), which reflects both different weightings and measures for shelter, medical care and car insurance. While we are not implying that the Fed will ignore the trend in these components of the Consumer Price Index (CPI) in their assessment, our view is that PCE will not necessarily be quite as hot given the differences in the measures. There is no doubt, however, that the start to 2024 has been bumpy in terms of the progress necessary to move away from what the Fed perceives is currently restrictive monetary policy, especially when coupled with another strong jobs report last Friday.

This challenge is being reflected in market reaction this morning as well. U.S. equity market futures were down around -1.5% to open the session, 2-Year and 10-Year Treasury yields snapped higher by +0.21% and +0.13%, respectively, and the U.S. dollar strengthened. In addition, the probability of a rate cut in June fell from 56% yesterday to only 20% today according to the CME FedWatch Tool. Coming up later today is the release of the minutes from the March Fed meeting, which could provide some additional context to how the Fed is thinking about the recent surge in inflation. We also will look to the University of Michigan Consumer Sentiment Index release on Friday for a read into how the consumer is reacting.


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