The Federal Reserve’s Preferred Inflation Measure Rose to 2.7% in March

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U.S. inflation rose to 2.7 percent in the year to March, another sign that price pressures remain stubbornly high and complicating the Federal Reserve’s plan to cut interest rates this year.

Data released Friday on personal consumption expenditures, the Fed’s preferred measure for measuring inflation, beat economists’ expectations of a slight increase to 2.6 percent from 2.5 percent in February.

The unexpected increase is likely to reinforce traders’ doubts that the Fed will cut interest rates this summer, as U.S. mortgage and other borrowing costs are expected to remain high ahead of November’s presidential election.

“Inflation is high, persistent and broad-based,” said Diane Swonk, chief economist at KPMG US. “Those are three things the Fed doesn’t want.”

The numbers come a day after data showed the U.S. economy grew far slower than expected in the first quarter while inflation remained above the Fed’s 2 percent target for the quarter, prompting a stock market selloff and a rise Treasury yields rose as traders trimmed their bets on rate cuts.

On Friday, markets reversed some of those moves, with the S&P 500 index rising 1 percent while the tech-heavy Nasdaq Composite rose 2 percent, helped by strong gains from Google parent Alphabet.

Moves in government bond markets were more muted, with the policy-linked two-year Treasury yield broadly unchanged at 5 percent and the benchmark 10-year bond yield 0.04 percentage point lower at 4.67 percent. Yields fall as prices rise.

The rise in inflation in March was largely due to a rise in the cost of gasoline as tensions in the Middle East drove up oil prices. Further inflation in energy costs would bring the risk of “cyclical stagnation” to an otherwise strong U.S. economy, said Freya Beamish, an economist at TS Lombard.

“If the price of oil is pushed down to $100 [per barrel]“For largely supply-side reasons, this could coincide with a wobble in U.S. labor markets that is already emerging,” Beamish wrote in a note. Brent oil futures traded at around $89.50 a barrel on Friday, up around 18 percent this year.

Core PCE, which excludes volatile food and fuel prices, remained at 2.8 percent in March, compared with an expected decline to 2.7 percent.

The latest economic data is a blow to US President Joe Biden, whose re-election campaign highlighted the steady decline in inflation, which hit multi-decade highs in 2022, as well as the continued strength of the American economy and labor market.

Lael Brainard, director of the White House National Economic Council, responded to the data by saying, “Although inflation has fallen more than 60 percent since its peak, today’s report underscores the importance of our ongoing work to reduce costs.”

She said the Biden administration has taken steps to lower the cost of prescription drugs, stop big companies from overcharging their customers and expand housing supply.

But Biden himself recently said he expects the Fed to start cutting interest rates this summer.

“In the last three months, inflation in the U.S. has really spiked, giving the Fed a slap in the face,” said Ajay Rajadhyaksha, global head of research at Barclays.

Futures traders are only fully pricing in the quarter-point rate cut at the Fed’s Nov. 6-7 meeting, shortly after the presidential election.

US borrowing costs are at their highest in 23 years, while the PCE index has been above the central bank’s 2 percent target since March 2021.

“We are likely to have stubborn inflation from here on out,” said Tim Murray, multi-asset strategist at T Rowe Price. He argued that price pressures are being fueled by factors such as demand for chips, semiconductor materials for artificial intelligence and clean energy.

“The news is not good,” he added. “If you look at things year-over-year, pretty much from every perspective, it looks like the trend is sideways to slightly up.”

Additional reporting by James Politi in Washington