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US inflation rose to 2.7 percent this year through March, another sign that price pressures remain high, complicating the Federal Reserve’s plans to cut interest rates this year.
Friday’s data on personal consumption expenditures, the Fed’s preferred gauge for measuring inflation, exceeded economists’ expectations of 2.6 percent, with a slight increase from 2.5 percent in February.
The unexpected rise is likely to increase traders’ doubts that the Fed will lower interest rates this summer, with U.S. mortgage and other borrowing costs expected to remain high until the November presidential election.
“Inflation is hot, it’s becoming stickier and more widespread,” said Diane Swonk, chief economist at KPMG US. “Those are three things the Fed doesn’t want.”
The figures come a day after data showed the U.S. economy grew slower than expected in the first quarter, while inflation for the quarter remained above the Fed’s 2 percent target, leading to a selloff in equity markets and Treasuries. Bonds soared. Yields rose as traders reduced rate-cut bets.
The market reversed some of those moves on Friday, with the S&P 500 index closing 1 percent higher, while the technology-heavy Nasdaq Composite closed 2 percent higher, helped by powerful gains for Google parent Alphabet.,
Moves in government bond markets were more muted, with the policy-sensitive two-year yield broadly steady at 5 percent and the benchmark 10-year yield down 0.04 percentage points at 4.67 percent. The production decreases as prices increase.
The rise in inflation in March was mainly driven by a jump in petrol prices, as tensions in the Middle East pushed oil prices higher. Further energy cost inflation would bring “cyclical stagnation” risks to the otherwise strong US economy, said Freya Beamish, an economist at TS Lombard.
“If oil is pushed to $100 (per barrel) primarily for supply-side reasons, this could coincide with fluctuations in US labor markets, which are already on the rise,” Beamish wrote in a note. is in the pipeline.” Brent oil futures were trading at around $89.50 a barrel on Friday and are up about 18 percent this year.
Core PCE, which excludes volatile food and fuel prices, stood at 2.8 percent in March, compared with an expected decline of 2.7 percent.
The latest economic readings are a blow to U.S. President Joe Biden, whose re-election campaign has emphasized a steady decline in inflation, which could hit a multi-decade high in 2022, along with the continued strength of the U.S. economy and job market. Has been.
Lael Brainard, director of the White House National Economic Council, responded to the data by saying that “while inflation has fallen more than 60 percent from its peak, today’s report reinforces the importance of our ongoing work to reduce costs.” Does”.
He said the Biden administration has taken measures to lower prescription drug costs, prevent large companies from overcharging customers and expand the housing supply.
But Biden himself recently said he expected the Fed to start cutting rates this summer.
“US inflation has really picked up over the last three months and is a huge slap in the face to the Fed,” said Ajay Rajadhyaksha, global head of research at Barclays.
Futures traders are now fully pricing in the first quarter-point cut at the Fed’s meeting on Nov. 6-7, just after the presidential election.
US borrowing costs are at a 23-year high, while the PCE index remains above the central bank’s 2 percent target since March 2021.
“We’re probably going to have sticky inflation from here,” said Tim Murray, multi-asset strategist at T Rowe Price. He argued that factors such as demand for chips, semiconductor materials for artificial intelligence and clean energy are putting pressure on prices.
“The news is not good,” he said. “If you look at things on a year-over-year basis, in almost every way, it looks like the trend is a little bit upward.”
Additional reporting by James Politi in Washington
