Kiplinger Inflation Outlook: Strong March Report Will Put the Fed on Pause

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For the third consecutive month, no progress was made against inflation. Prices rose 0.4% in March, the federal government reported, pushing the 12-month inflation rate up to 3.5%. Excluding food and energy, prices also rose a monthly 0.4%, keeping the annual rate of so-called core inflation at 3.8% for the second month. Services prices excluding housing rose a strong 0.6%, with car insurance and repair prices both up about 3% on the month. This is a key inflation measure the Federal Reserve tracks in order to see whether price momentum is continuing or not.

On the plus side, prices of groceries were unchanged on a monthly basis for the second month in a row and were up only 1.2% from a year ago. Although energy prices rose for the second straight month, the prices of all other goods returned in March to their normal pattern of small monthly declines, after an upward blip in February. Prices of both new and used cars and trucks declined a bit in March as inventories improved. 

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The lack of progress will mean the Federal Reserve will not be cutting interest rates until its July 31 meeting at the earliest. If inflation reports don’t improve, the Fed could push off any rate cuts until its November 7 meeting, after the election. The Fed is probably hoping that it will be able to cut in July, because then it could follow a pattern of cutting at every other meeting and avoid having to cut at its Sept. 18 meeting, during the height of the presidential campaign.

There is still a decent chance of a rate cut this summer. We expect that smaller increases in rents will result in a lower inflation rate for shelter. This hasn’t shown up in the broad inflation reports yet, but should in the near future. But the Fed will need to see easing inflation in the next several reports in order to justify an interest rate cut. While we expect that the April report will show another increase in gasoline prices, the Fed has typically discounted energy price changes. So, the key focus will be on housing and other services. 

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