Inflation stays stubborn: What the latest numbers mean for you

Despite predictions at the end of last year, inflation has refused to drop significantly, leading Federal Reserve watchers to join Minneapolis Fed President Neel Kashkari in questioning whether rate cuts will come in 2024.

The consumer price index (CPI) rose 3.5% year-over-year for March, 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 keep price increases under control. And those decisions could keep debt, from mortgages to credit cards, more expensive than has been expected.

“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. Inflation reached 9.1% in June 2022, prompting the Fed to hike interest rates in an effort to slow consumer spending. The rate of inflation fell for months afterward 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 anytime soon. Though the Federal Open Market Committee (FOMC) has 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 last year was a voting member of the FOMC, 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?”

What should consumers make of all this? Here’s what Wednesday’s numbers — and the potential Fed reaction — could mean.

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 that 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 that 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.”

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.

“Markets reward expectations, and so whenever anything isn’t exactly as you’d expect, you get these impacts that you’ll see today,” said Allison Kaminaga, a lecturer in the mathematics and economics department at Bryant University.

The concern isn’t that inflation will rise too much, she said, but rather what it will take to reach 2%.

“Maybe that last mile, if you will, is the most challenging,” she said.

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.

“The main reason that creates concern is that those kinds of inflation rates move relatively slowly, and so if that growth rate becomes entrenched, then it’s going to be even more difficult getting the inflation rate down to the Fed’s target,” said V.V. Chari, a University of Minnesota economics professor.

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. 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.

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 6.8% bump in electricity prices, while utility gas fell 16.7%.

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. Nationally, gasoline was up 1.3% year-over-year. A gallon of unleaded regular 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 regular 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.

For those looking for a new (or new-to-them) car, there’s a bright spot: The prices of new and used vehicles have fallen. The average U.S. price of a new vehicle in February was $47,244, down 5.4% from the December 2022 peak but still nearly 14% higher than February 2021, according to the latest Kelley Blue Book numbers.

Gas prices aside, this might be a good time to take that trip: Air travel, hotel rooms and car rentals were all down from a year ago. At Minneapolis-St. Paul International Airport, the average airfare in the third quarter of 2023 — the most recent available data — was $386.79, compared to $413.59 the previous year.

Eating at a restaurant — or at work, school or from a vending machine — is more expensive than 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.

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% drop in grocery inflation compared to a year ago.

The Associated Press contributed to this report.