Despite predictions at the end of last year, inflation has refused to drop significantly, leading even experts like Minneapolis Fed chair Neel Kashkari to question if promised rate cuts will ever actually come in 2024.
The consumer price index (CPI) rose 3.5% year-over-year, up from 3.2% in February, with housing and gas prices driving most of the 0.4% monthly increase. In the Twin Cities metro, inflation rose 2.7% year-over-year, but it's the national numbers that will inform monetary policymakers' decisions about how best to wrestle the economy under control: Decisions that could make debt, from mortgages to credit cards, more expensive.
"The bottom line is, the March inflation report is an unwelcome message to the markets, and probably the Fed, that its inflation fight is far from over," said Scott Anderson, chief U.S. economist and managing director at BMO capital markets. "A patient Fed with a Fed chair who's in no rush to cut interest rates must be at least mulling the possibility that they may need to do more to put a stake in inflation's beating heart."
The CPI measures the change in prices consumers paid for goods and services. Price increases reached 9.1% in June 2022, prompting the Fed to hike interest rates to 5.25% to 5.5% in an effort to slow consumer spending. The rate of inflation fell for months but has since ticked back up, with "Core" inflation, which excludes volatile food and fuel prices, up 3.8% last month.
The latest numbers are nowhere near the previous 40-year high, but they're far enough from the Fed's 2% target to make the central bank hesitant to cut borrowing costs too soon. Though the Federal Open Market Committee (FOMC) last month stuck to last year's projection of three rate cuts in 2024, Wednesday's report could change minds.
"Ultimately, we've been surprised in a good way that the economy has been very resilient, even though we've raised interest rates a lot," Kashkari, who was a voting member of the FOMC last year, said in an interview last week with Pensions & Investments. "So if we continue to see strong job growth, if we continue to see strong consumer spending and strong GDP growth, then that raises a question in my mind, well, why would we cut rates?"
As for what consumers should make of all this, here's what Wednesday's numbers — and the potential Fed reaction — could mean.
Loan seekers and debt payers
The Fed's interest rate decisions influence the cost of money. Higher rates make purchases more expensive, which is the point: When consumers spend less, prices drop.
Spending has stayed fairly strong in the face of rate hikes, but consumer debt is on the rise. And given Wednesday's news, it's unlikely buying a house, financing a small business or paying off a credit card will become more affordable anytime soon. A 30-year fixed mortgage rate is still about 7%. That's not the double-digit rates of the 1980s but still a far cry from the historic lows of the pandemic.
Rate cut advocates argue higher interest rates are doing more harm than good when it comes to the cost of living.
"While today's numbers are disappointing, they should not deter the Fed from their planned interest rate cuts," Rakeen Mabud, chief economist at Groundwork Collaborative, said in a statement. "High interest rates won't bring down the high housing and energy costs that are driving the affordability crisis for millions around the country."
Market watchers
The flip side of high interest rates is a higher return on investments, so for those who've been able to save — retirees, for example — the current environment means higher yields, Anderson said. But there's a flip side to that flip side: The markets react to inflation news, and stock prices dropped Wednesday following the CPI report.
Though the outlook for growth and consumer spending remains strong, Anderson said, the economic "soft landing" the markets had been pricing in is becoming less likely.
Renters
Nationally, shelter costs were up 5.7% year-over-year in March, the same as the bump in rent. Housing is considered a service, and services inflation has stayed high, feeding the stubbornness of inflation as a whole even as goods inflation has decreased.
Rental demand remains strong, in part because of the high cost of single-family homes. The average Twin Cities monthly rent in the fourth quarter of 2023 was $1,479 a month. The local CPI report showed rent was up 4.4% year-over-year.
"Housing costs show no sign of falling," said Louis Johnston, an economics professor at the College of St. Benedict and St. John's University.
Homeowners
Like rents, mortgages are likely to stay expensive, Johnston said. Nationally, owners' equivalent rent was up 5.9% from March 2023. In the Twin Cities, the increase was 5.7%.
And as anyone who owns a home knows, the mortgage is just the beginning. Homeowners' insurance — a category that also includes tenants' insurance — was up 4.6% nationally. Electricity was up 5%, though utility gas service dropped 3.2%. The Twin Cities saw a smaller bump in electricity costs at 3.1%, while utility gas fell more than 12%.
Drivers
The ongoing conflicts in Ukraine and the Middle East are showing up in gas prices, which already tend to tick up as demand rises in the summer months. Nationally, gasoline was up 1.7% year-over-year. A gallon of unleaded gasoline cost $3.58 in March, up 22 cents from February but still down about 73 cents from March 2022. In the Twin Cities, unleaded gasoline was cheaper in March than it was the year before but jumped more than 7% from February.
Meanwhile, car insurance costs were up more than 22% nationally from a year ago, as insurance companies price in more expensive car repairs and an uptick in disaster-related claims.
Travelers
Gas prices aside, this may be a good time to take that trip: Travel has, by and large, become cheaper. Air travel, hotel rooms and car rentals were all down from a year ago.
Diners
Eating at a restaurant — or at work, school or from a vending machine — is more expensive than it was a year ago, rising 4.2% from March 2023 nationwide and 5.9% in the Twin Cities. The more immediate picture is steadier, though, with increases hovering at or under 0.5% nationally in recent months.
Cooks
Grocery prices, a hallmark of the inflation pain of recent years, have leveled. The national year-over-year increase was about 1%, but month-to-month "food at home" inflation remained unchanged for the second month in a row. The Twin Cities have fared even better, with a more than 2% in grocery inflation compared to a year ago.
The Associated Press contributed to this report.
