March Inflation Comes In Hotter Than Expected

Annual inflation ticked up and underlying price pressures remained strong last month. The Labor Department said Wednesday that the consumer price index rose 3.5% in March.

Investors and economists have been looking forward to Wednesday’s release with unusually high interest—even by the standards of CPI reports, which are always a highlight of the monthly economic calendar.

Recent data showed inflation running higher than expected in January and February, an unwelcome break from months of encouraging reports that showed a marked decline in the pace of price increases.

Still, Federal Reserve officials haven’t reacted as strongly to those firmer readings as they might have, describing them as bumps on the road to their 2% inflation target that don’t derail plans to cut interest rates this year.

That has put extra focus on the March CPI reading. Many analysts have said that a third consecutive month of disappointing inflation data could warrant a bigger shift in the Fed’s inflation and policy outlook.

Investors started the year expecting more rate cuts than the Fed but have changed their views in response to both the inflation reports and solid economic activity data.

Last month, a narrow majority of Fed officials thought at least three cuts would be warranted this year if inflation continued to decline. Interest-rate futures suggest that investors generally now have the same forecast—after expecting six cuts coming into the year. Some are going further, betting that the Fed will cut rates just once or…   twice, or not at all.

Employment data released Friday provided fuel for their skepticism. It showed the economy added far more jobs than expected in March, a possible sign higher interest rates aren’t as restrictive as many had thought.

Still, many economists remain optimistic that inflation is on its way down.

Among other things, they have said that the especially hot January data might have been boosted by one-time, start-of-the-year price adjustments. They have also argued that the recent run of strong economic growth and brisk hiring can be partially attributed to increased immigration.

Rather than stoking inflation, this influx of workers might have reduced competition for labor and made it easier for businesses to meet demand for their products, thereby curtailing price increases.

Surveys suggest that Americans remain frustrated by the cost of living. Indexes of consumer sentiment have gradually improved but remain well below prepandemic levels. A recent Wall Street Journal poll of voters in seven of the most competitive states in the 2024 election found that 74% thought that inflation had moved in the wrong direction over the past year.

Possibly weighing on sentiment: Some important interest rates that aren’t directly controlled by the Fed have ticked higher recently. Mortgage rates, for example, are closely linked to yields on longer-term U.S. government bonds, which have climbed this year as investors have dialed back their bets on Fed rate cuts.

The average 30-year fixed mortgage rate has been hovering around 6.8%, according to Freddie Mac, up from 6.6% at the end of last year and 3.7% in late 2019, just before the pandemic.