One thing that moved markets

… is US consumer prices, which came in hotter than expected in March, which means expensive trips to the grocery store, and could signal that the Federal Reserve is unlikely to cut interest rates in the next few months.

Inflation reports have become the most closely watched economic indicator in recent years, and the March Consumer Price Index (CPI) was no exception. The data showed prices accelerated 0.4% from February and 3.5% annually. Excluding volatile food and energy costs, prices increased 0.4% from February and 3.8% from March 2023.¹

While some categories, such as eggs and pork chops, have seen recent upward movement, grocery prices overall have plateaued. You better think of a swap for orange juice, though, because the cost of juices and drinks has gone up 27.5% in 12 months. Baby formula is also up 9.9% year-over-year.²

The report wasn’t just bad news for beverages, but markets, too. Overall prices increased for the second consecutive month and more rapidly than analysts had expected. The shorter-term price trend is also a cause for concern: On a 6-month annualized basis, core CPI increased to 3.9%, its highest level since July 2023.³

Both headline and core inflation are far from the Federal Reserve’s 2% target and heading in the wrong direction. A 1.1% increase in energy and 0.4% increase in shelter largely influenced the overall reading, accounting for more than 50% of the total increase. The annual increase to shelter was  5.7%.

The “supercore” basket the Fed has been focused on, which includes core services minus housing, also increased at its fastest pace since May 2023 at 0.7% month-over-month and 4.8% annually.      

Other monthly price surges include gas (+1.7%), car insurance (+2.6%) medical care services (+0.6%), and rent (+0.4%). Drivers can’t seem to catch a break, with car insurance having increased 22% and repairs up 8.2% compared to a year ago. While prices for new and used cars have fallen this year, the cost of a new ride will cost significantly more than prices pre-pandemic: The average price of a new car in February was $47,060, up about 23% from four years ago.⁴

There are a couple of silver linings though – while vehicle prices are high, used vehicle prices saw a 1.1% decline from February and 2.2% drop year-over-year. Additionally, grocery prices remained flat for the second month in a row while airline fares and restaurant prices fell 7.1% and 4.2% annually, respectively, the latter of which marked the lowest rate since June 2021. Health insurance also saw a 15% decline from last year.⁵

Despite these positive developments, the overall data underscores the ongoing challenges facing the Federal Reserve and the broader economy. As Fed Chair Jerome Powell has indicated, the path down to 2% remains “a bumpy ride”.

Adjusting expectations

Leading into 2024, markets welcomed the so-called “immaculate disinflation”, where inflation gradually receded from its 9% peak back to 3%. However, that drop has largely stalled this year, causing investors to second-guess the recent assumption that inflation would easily return to 2%.

Sticker inflation is making it harder to justify cuts, and each month inflation hovers around or above 3% the prospects of a cut diminishes. With inflation ticking up, it’s likely that the first cut will be pushed back further in 2024. Now, the market sees a roughly 15% chance of a June cut (down from 56% earlier this week) and a 40% possibility of cuts in July, according to CME’s FedWatch Tool.⁶ September is now the earliest Fed meeting where markets expect a greater than 50% chance of a cut.

A resurgence or even a continuation of inflation at these levels may present a compelling reason to keep rates right where they are, if not higher.

Impact on the economy

The optimistic take on inflation increasing or holding at these levels is that the US economy is growing more than expected, and that strength is serving as a tailwind for prices. In other words, a strong economy is boosting prices.

In that scenario, higher inflation is a sign of growth, which may be positive for the labor market and could keep the US away from a recession. Nevertheless, sticky inflation isn’t ideal for borrowers who were expecting rate cuts.

And a few top headlines

The White House unveiled a plan to potentially offer student loan relief as early as this fall.

• The plan could cancel student debt for four million borrowers, reduce debt for over 10 million borrowers, and eliminate interest past the original loan amount for 23 million borrowers.⁷

The IRS added an update for its free Direct File pilot ahead of this year’s April 15 tax deadline.

• This pilot program has been open for filers in 12 states since March 12th. The new feature that automatically adds your previous year’s adjusted gross income is expected to resolve the main issue preventing successful filings.⁸

Despite elevated mortgage rates, the US has a record number of 550 cities where a $1 million+ home is typical, an increase from 491 last year.

• Ironically, the higher rates that generally push prices lower have created a housing freeze where homeowners who locked in low mortgage rates are deterred from selling. This lack of supply has helped push prices higher.⁹

What to be on the lookout for next week

Earnings reports, which are often bellwethers of market strength.

In the fourth quarter of 2023, earnings saw a 5.5% year-over-year increase, which exceeded the 3.2% rise in the Consumer Price Index, indicating real income gains that, if sustained, could boost consumer spending and economic health.¹⁰

As for the previous State Job Openings and Labor Turnover report, January’s data didn’t change much from February, with the rate of job openings, hires, total separations, quits, and layoffs holding relatively steady.¹¹

For the next release, another month of “no news” could be good news as the economy strikes a balance to keep the labor market resilient but conducive to inflation coming down.