Higher for Longer

Parents of young children will recognize the danger of a one-word question: “Why?” By persistently asking why, a child can frustrate and unravel the thinking of their caregivers.

We are re-learning the power of that simple question. We had expected the Federal Reserve to start cutting rates in June. But as more of our audiences asked why, we saw the case was not strong. This week’s inflation reading seals the deal: we now expect the easing cycle to start in September.

The consumer price index (CPI) for March was above expectations, rising 0.4% for the month on both a headline and core basis. The details were all too familiar: shelter inflation remains stubbornly elevated. Core services excluding housing ticked upward, led by volatile categories like vehicle maintenance and insurance. On a year over year basis, core service prices have been rising since October 2023; components of this category share a common dependency on labor. New immigration has not yet relieved the limited supply of skilled workers, and their wage gains are passing through to prices.

While the Fed targets personal consumption expenditure (PCE) inflation rather than CPI, the two indices have moved in tandem in this cycle. And while the target excludes the volatile categories of food and energy, higher gasoline prices will keep this matter top-of-mind for consumers.

CPI Inflation Annualized and Core Inflation