As sky-high interest rates remain the hot topic of late, with the U.S. Federal Reserve recently electing to increase its benchmark interest rate by 25 basis points, it is that time of the month again when market participants analyse the latest U.S. Consumer Price Inflation (CPI) data. Seeing that the federal funds rate was recently increased to its highest level since September 2007, it is evident that market participants are hoping for a continued downtrend in price levels to pave the path for the FED to pause rate hikes.
With “all eyes laser-focused on March’s CPI report,” U.S. equity futures have ticked higher as inflation comes in “cooler than expected.” The annual U.S. CPI figure comes below expectations at 5% for March, significantly down from 6% for February, indicating that inflation may be on a sustained downward path. Market participants will be relieved to note that the annual increase in the all-items index of 5% for March represents the “smallest 12-month increase since the period ending May 2021.” On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) increased by 0.1% in March after rising by 0.4% in February. While the food index remained unchanged in March, there was a notable decline in the energy index, which fell by 3.5% in March after ticking down by only 0.6% in February. Over the last 12 months, the energy index has declined by 6.4%, but the shelter index remains high, increasing by 0.6% month-over-month and surging by 8.2% over the last 12 months. While headline inflation declined significantly to 5% for March, core inflation remains stubbornly high.
The latest CPI data has most definitely increased the likelihood of a pause in the FED’s rate-hiking cycle in the next FOMC meeting in May. However, market participants will know that the disinflationary process still has some way to go before inflation comes down to the much-desired 2% target rate.