US inflation (as measured by the consumer price index) had been running at 3.2% in the second half of 2023. While that was still above the US Federal Reserve’s 2% target for core inflation, it was not too far off. In the first three month of this year, that average has jumped to 4.5%.
The Fed had been hoping that the higher figures in January and February would not last. Chair Jerome Powell had said that those numbers did not change the overall picture – that inflation was moving down gradually after peaking at 9.1% in June 2022.
Another high figure for March has challenged that story. It is no longer so easy for policymakers to dismiss the latest inflation pressures as transitory.
Markets have reacted by reducing their expectations for the number of cuts in the Fed’s policy rate this year and significantly lowered the chance of any cut already in June.
As always, the Fed will remain ‘data dependent’ as it weighs policy decisions. But, unless inflation drops back sharply in the next two months, it could be a while before we see any reductions in the fed funds rate from its 23-year high of 5.25-5.50%.
