Underlying US inflation is putting up a strong fight against the Federal Reserve’s aggressive interest rate hike assault, while general price rises are falling quickly, sending mixed signals to chair Jerome Powell and co ahead of their interest rate decision next month.
Official figures out from the US Bureau of Labor Statistics today showed the underlying rate of price increases – known as core inflation, seen as a more accurate measure of price pressures – hit 5.6 per cent last month.
The reading was in line with Wall Street’s expectations and was up from 5.5 per cent in February.
The US’s tech-heavy Nasdaq, S&P 500 and Dow Jones stock indexes all dropped after a few hours of trading. The US dollar weakened around 0.4 per cent, according to the Wall Street Journal’s dollar index, which measures the greenback against a basket of comparative currencies.
Monthly core inflation – which provides clues on whether inflation is gathering near term momentum – slimmed to 0.4 per cent from 0.5 per cent.
The core inflation rise signals the Fed’s series of interest rate hikes – which have hoisted the federal funds rate 475 basis points from March 2022 to a range of 4.75 per cent and five per cent, the fastest increases since the 1980s – have yet to fully filter through the US economy.
Markets were pretty unanimous in backing another 25 basis point increase from Powell and the rest of the federal open market committee (FOMC) at their next meeting 3 May before today’s numbers. After, they were pricing in an around 70 per cent chance of such a move.
Firming price pressures means “the odds are rising that the Fed will push on with another final 25 basis point rate hike at its next policy meeting,” Paul Ashworth, chief north America economist at Capital Economics, said.
“This report will not prevent the Fed from hiking in May; officials have made it clear that they want to see a run of slowing increases,” Kieran Clancy, senior US economist at Pantheon Macroeconomics, said.
But a separate reading suggested the rate of price increases is on course to fall quickly this year, suggesting the FOMC’s efforts are already taking effect.
Consumer price inflation, the US’s official inflation measure, tumbled to five per cent on an annual basis, lower than Wall Street’s 5.2 per cent forecast, the lowest rate in nearly two years and down from six per cent. Over the last month, prices jumped just 0.1 per cent.
Headline inflation was mainly fuelled by rents climbing over eight per cent. Energy and petrol price increases, which have mainly fuelled the inflation crunch in the US, continued to cool, with the categories respective rates trimming to around minus 17 per cent.
US inflation has been steadily falling from its summer peak of more than nine per cent.
Fears of re-sparking volatility in the global banking sector by straining financial markets further could convince the Fed to hold off the clamp, some market participants reckon.
The International Monetary Fund yesterday warned the global economy could be choked by further banking crises similar in scale to Credit Suisse being pawned off to rival UBS and Silicon Valley Bank failing if central banks have to keep interest rates in restrictive territory if inflation hangs around for longer than fears.
New numbers for the UK out next Wednesday are expected to show inflation has finally dropped out of the double digits for the first time since September last year.