The U.S. consumer price index (CPI) for March 2024 has brought a significant development – it revealed a year-on-year increase of 3.5%, slightly above the 3.4% that had been anticipated. This data point is a crucial indicator of inflation. It reflects the average change over time in the prices paid by urban consumers, for a market basket of consumer goods and services. Its significance lies in its ability to shape market expectations and influence monetary policy decisions.
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A Closer Look at the Numbers
The breakdown of the March CPI data reveals several key insights into the current inflationary landscape. Notably, the core CPI, excluding volatile food and energy prices, exceeded expectations with a month-on-month rise of 0.4%, matching the previous month’s increase and surpassing the expected 0.3%.
Shelter costs, which include expenses related to renting or owning a home, are a significant part of the Consumer Price Index (CPI). They continued to rise steadily, increasing by 0.4% from the previous month, reflecting a similar rise in owner’s equivalent rent. The owner’s equivalent rent represents the hypothetical rent that a homeowner would pay if they were renting their home.
The trend is confusing because while market rents are decreasing, shelter costs are increasing. The rise in shelter costs was indicated by the shelter index’s year-on-year increase of 5.7%. This raises confusion because one would expect a drop in market rents to lower shelter costs too.
Chicago Fed President Austin Goolsbee has also noticed the importance of accurately reflecting these changes in official inflation numbers. The gap between falling market rents and increasing shelter costs shows how complex it is to accurately measure housing-related inflation in the CPI.
Moreover, the report indicated a notable surge in services and less rent for shelter, which increased by 0.65% month-on-month, marking an acceleration from the previous figure. This category, along with medical care, which saw a 0.5% increase, represents areas of growing concern in the inflation picture.
Market Reactions and Federal Reserve Implications
The Fed funds futures market adjusted its rate cut expectations for 2024, dropping from 68 basis points (bps) at the start of the day to 45 bps post-report. Given the surge in U.S. 2-year yields, the market could drop lower, signaling a market adjustment to a higher-for-longer interest rate scenario as anticipated by the Fed.
The U.S. dollar strengthened against major currencies, hitting the EUR-USD particularly hard. It’s down -1.02% to 1.0746 at the time of writing, possibly setting up the EUR/USD’s worst day since February 3, 2023. Similarly, the Yen Index just collapsed to new all-time lows, with the USD-JPY reaching levels not seen since June 1990.
