INFLATION WATCH heats up for March, which freaks out the Street

As 2024 began, there was an expectation that the calming of inflation that we saw in 2023 would continue, which would allow the Federal Reserve to cut its Fed Funds borrowing rate from the 5.25%-5.5% level that it’s at today.

But then the Consumer Price Index grew by 0.3% in January and 0.4% in February, and that made people look to this week’s CPI report for March to see if inflation was back on the rise, or if the interest rates were indeed going to come down soon.

The result?

JUST IN: Inflation in March came in hotter than expected: 0.4% for the month and 3.5% in the past year. (The forecast was for 0.3% and 3.4%)

Gas and rent accounted for over HALF the March increase.

Higher gas price and high rent are keeping inflation above 3%. pic.twitter.com/eSYDkhkUj9

— Heather Long (@byHeatherLong) April 10, 2024

fallout from the hot CPI print:
Expectations for a rate cut by June fell from ~57% chance yesterday to about 19% chance today.https://t.co/VfBhge8Fv5 pic.twitter.com/vmmmm21OPJ

— Catherine Rampell (@crampell) April 10, 2024

Uh oh. Now a lot of people are worrying, and “inflation” is going to re-emerge as something the media is going to want to talk about. It’s the worst back-to-back month of increases since last Summer. Over the last 8 months, this means the CPI has risen by 2.5%, which comes out to an annual rate of around 3.8%.

Not great, but a check under the hood of the topline numbers doesn't indicate to me that inflation is going to any point that’ll limit our real economy. First of all, take a look at the large culprits behind March’s 0.4% increase in the CPI. In addition to the gas and rent increases, there also appears to be some convenient price hikes from big insurance and medical care.

The motor vehicle insurance index rose 2.6 percent in March, following a 0.9-percent increase in February. The index for apparel increased 0.7 percent over the month. Among other indexes that rose in March were personal care, education, and household furnishings and operations.

The medical care index rose 0.5 percent in March after being unchanged in February. The index for hospital services rose 1.0 percent over the month and the index for physicians’ services increased 0.1 percent. The prescription drugs index rose 0.3 percent in March.

Go out to 12 months, and we see that car insurance is up a whopping 22.2% in the last year, hospital services are up 7.5%, and home care for the elderly and disabled is up 14.5%. That’s something that seems worthy of public hearings on the state and federal levels, and in need of stiff regulation and/or added competition.

The apparel increase is especially odd, as men’s and boys’ apparel dropped by 1.0% in March, but women’s and girls’ apparel went up by 1.7%, and female-targeted clothing is apparently 55% more expensive than male-targeted apparel, according to the CPI market basket of goods and services.

And the 12-month inflation story for clothes is the opposite – men’s/boys’ apparel up 1.0%, and women’s/girls’ apparel down 0.1%. So I don’t think clothes’ prices are going to the roof, and that March’s fluke increase will not continue in the next CPI report.

I also note that prices for “food at home” stayed flat for the second straight month in March, and are only up 1.2% in the last year. Yes, it’s still up more than 20% since March 2021, and that’s something that everyday people still will notice (along with allowing for a lot of food companies and grocers to get strong profits). But the rate of increase has definitely gone back to pre-COVID normals since the end of 2022, while wages have increased by 2-3 times as much over that same time period.

The other item that makes me think that inflation isn’t going to stay at the 4-5% level for the rest of 2024 (at least in the current situation) is that the lagging indicator of shelter continued to run high in March at 0.4%. When you look at recent trends in new home and rental prices, those increases are ending, so we should see shelter’s CPI level off in the coming months.

However, Wall Street seems to think that this CPI report and the strong jobs numbers will scare off the Federal Reserve from lowering rates off of their 23-year highs anytime this Spring and Summer. And that reversal of belief is a main reason behind the selloff that we’ve seen throughout the month of April, with the DOW down as much as 1,500 points until some of those losses were pared in the second half of today's trading.

I think delaying rate cuts from these high levels is wrongheaded, and I have strong suspicions that much of these increases have little to do with shortages (well, beyond a shortage of competition and regulation). And today's report of a relatively tame 0.2% increase in March for producer prices backs up my thought that we aren't looking at a chain reaction of continued price hikes that have to work its way through in the future.

But we also have to admit that the economic news of the last week does mean that we’re getting another season of INFLATION WATCH, no matter how legitimate or BS the CPI increases may be.