US Inflation, Job Market Take June Rate Cut Off the Table –Moody’s

The 0.4% increase in the headline consumer price index (CPI) in March likely puts to bed hopes that June’s Federal Open Market Committee meeting would usher in the first interest rate cut, Moody’s said in a recent note.

According to the global ratings firm, consumer inflation figure increase for March surpassed expectations of a 0.3% increase and lifted the annual rate from 3.2% to 3.5%, its highest since September.

Excluding food and energy, core CPI rose 0.4% in March. March’s increase keeps the annual core CPI rate at 3.8%, the same as February. Using an annualized three-month moving average, core CPI was running at 4.5% in March, its highest since early 2023.

Moody’s Analytics had forecast a 0.2% increase in the core CPI from February to March, softer than the consensus. Taken to the second decimal point, our 0.15-percentage point miss is attributed to three components.

First, motor vehicle insurance jumped 2.6% from February to March—bigger than any monthly gain during the supply-chain crunch in 2021 and 2022.

Secondly, Moody’s noted that motor vehicle maintenance and repair prices rose 1.7%, also higher than we anticipated. “Though vehicle inflation is behind us and prices are now inching downward, car insurers and mechanics are still playing catch-up”.

Third, the CPI for medical care came in hotter than expected as well, albeit to a lesser degree. Though up just 2.1% relative to a year ago, healthcare inflation is accelerating.

The increase from February to March of 0.6% is unsustainable, Moody’s said but added that the nature of healthcare means inflation is stickier—contrary to other major items in the CPI basket, healthcare inflation will be stronger in 2024 than in 2023.

Healthcare prices are often agreed to far in advance and are thus slower to adjust to higher input costs. One of those inputs is labor. Hospitals and other care facilities struggled immensely to adequately staff their operations during the past few years and were forced to increase pay.

According to the note, bottom-line pressures mean providers are lifting prices, which are still working their way through to consumers.  It said the method the Bureau of Labor Statistics uses to calculate the CPI for medical care services relies on health insurers’ retained earnings, which is different from the PCE deflator’s methodology.

Nevertheless, the underlying dynamics hold and will bring healthcare inflation under more scrutiny in 2024 than it was last year. Shelter prices were not to blame for March’s surprise. The CPI for shelter rose 0.4% and was up 5.7% relative to a year earlier.

The CPI for rent of primary residence rose 0.4%—still a stubbornly slow moderation and divergent from data on market rents but in line with expectations. Owners’ equivalent rent rose 0.4%. This remains a key source of inflation’s stubbornness and must ease for overall inflation, measured by the CPI, to complete the last mile to the Federal Reserve’s target range.

A rate cut at June’s meeting is likely off the table given stubborn inflation and the still-robust job market.

March’s report was a disappointing one, but anxieties should be held in check, Moody’s said. It noted that hot CPI reports have been accompanied by lukewarm PCE deflator data.

Progress in the fight against inflation has certainly stalled, but the core PCE, which relies less on shelter and measures healthcare inflation differently, has steadily inched downward. PPI looks a bit better.

“Though we expected a sharper deceleration, March’s PPI report should be received warmly”. The 0.2% increase from February to March in the PPI for final demand is a touch below consensus expectations.

The monetary policy implications are relatively minor as the Fed remains concentrated on the price increases U.S. households are facing. For the Fed’s preferred measure, the core PCE deflator, car insurance prices are determined by the PPI’s auto insurance measure, not the monthly reading in the CPI.

There, the story is more encouraging. The PPI for final demand auto insurance rose 0.1% in March. If the CPI for motor vehicle insurance would have risen by that amount, core CPI would have come in on the lower end of expectations.

“For that reason, our preliminary read on March’s core PCE deflator is that growth was slower than the 0.4% rise in the core CPI”, Moody’s stated.