U.S. Core CPI Tops Forecasts Again

A measure of underlying U.S. inflation topped forecasts for a third straight month, heralding a fresh wave of price pressures that will likely delay any Federal Reserve interest rate cuts until later in the year.

The so-called core consumer price index (CPI), which excludes food and energy costs, increased 0.4 percent from February, according to government data out Wednesday. From a year ago, it advanced 3.8 percent, holding steady from the prior month.

Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4 percent from the prior month and 3.5 percent from a year ago, an acceleration from February that was boosted by higher energy prices, Bureau of Labor Statistics (BLS) figures showed.

Wednesday’s report adds to evidence that progress on taming inflation may be stalling, despite the Fed keeping interest rates at a two-decade high. With a strong labor market still powering household demand, officials have been adamant they’d like to see more evidence that price pressures are sustainably cooling before lowering borrowing costs.

Treasury yields and the dollar jumped, while S&P 500 index futures tumbled. Swaps traders slashed the degree to which they expect the Fed to cut rates this year. Minutes from the Fed’s meeting last month will be released later Wednesday.

“The sound you heard there was the door slamming on a June rate cut. That’s gone,” David Kelly, JPMorgan Asset Management’s chief global strategist, said on Bloomberg Television.

Core CPI over the past three months increased an annualized 4.5 percent, the most since May.

Gasoline and shelter accounted for more than half of the overall monthly advance, the BLS said. Costs for car insurance, medical care, and apparel increased in the month, while prices for new and used cars fell.

Shelter prices, which is the largest category within services, rose 0.4 percent for a second month. Owners’ equivalent rent—a subset of shelter, which is the biggest individual component of the CPI—climbed by that much as well.

Excluding housing and energy, services prices accelerated to 4.8 percent from a year ago, the most since April 2023, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.

That measure, known as the personal consumption expenditures (PCE) price index, doesn’t put as much weight on shelter as the CPI does. That’s part of the reason why the PCE is trending much closer to the Fed’s 2 percent target.

Policymakers will have access to one more PCE report, as well as another look at the producer price index (PPI), before their next policy meeting concludes on May 1. Fed officials have effectively ruled out a rate cut then.

“Even though the Fed doesn’t target CPI, it is another reason for delaying any rate cuts and/or reducing the number expected this year,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “If service sector inflation is sticky, then it doesn’t leave much room to ease.”

What Bloomberg Economists Say…

“The Fed is likely to take a stronger signal that disinflation momentum is slowing from this report. We push back our expectation for a first rate cut to July, from our previous baseline of June.”

— Anna Wong & Stuart Paul

Unlike services, a sustained decline in the price of goods over most of the past year has largely been providing some relief to consumers—though economists expect that to be a less reliable source of disinflation going forward. So-called core goods prices, which exclude food and energy commodities, fell 0.2 percent in the month.

With energy prices also back on the rise, it’s unclear where the next big drag on inflation will come from. Economists have long been anticipating some easing in shelter price growth, but so far that hasn’t really happened yet.

Policymakers have also been hesitant to cut interest rates given the strength of the labor market, especially after last week’s jobs report showed robust hiring and the unemployment rate fell. A separate report Wednesday showed real earnings growth decelerated, rising at the slowest annual pace since May.

That helps explain why President Joe Biden’s approval ratings are struggling for momentum going into this year’s presidential election.

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