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Higher gas prices and higher rents are keeping US inflation high, likely delaying Fed rate cuts

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Higher gas prices and higher rents are keeping US inflation high, likely delaying Fed rate cuts

WASHINGTON (AP) — Consumer inflation remained persistently high last month, boosted by gas, rent prices, auto insurance and other issues, the government said Wednesday in a report that will likely give the Federal Reserve pause as it considers how much — and even if — to lower interest rates this year.

Prices outside volatile food and energy categories rose 0.4% from February to March, the same accelerated pace as the previous month. Measured compared to a year earlier, these core prices increased by 3.8%, unchanged from the year-on-year increase in February. The Fed watches core prices closely because they often provide a good indication of where inflation is headed.

Wednesday’s figures are a disappointment for the White House. Republican critics of President Joe Biden have tried to pin the blame for high prices on the president and use it as a cudgel to derail his re-election bid. Polls show that despite a healthy labor marketa near record high stock market and a decline in inflation from its peak, many Americans blame Biden for the high prices.

March figures, the third straight month of inflation well above the Fed’s 2% target, provide worrying indications that inflation remains at elevated levels after falling steadily in the second half of 2023 . The latest figures threaten the prospect of multiple interest rate cuts this year. Fed officials have made it clear that if the economy is healthy, they are in no hurry to cut their benchmark interest rate, despite their previous forecasts that they would do so three times this year.

Gasoline prices are seen at a gas station in Riverwoods, Illinois, on Monday, April 1, 2024.

The report “puts cold water on the view that the faster numbers in January and February simply represented the start of new year price increases that were unlikely to last,” Kathy Bostjancic, chief economist at Nationwide, said in a research note. “The lack of moderation in inflation will undermine Fed officials’ confidence that inflation is on a sustainable path back to 2% and will likely delay rate cuts until September at the earliest and could delay rate cuts into next year.”

On Wall Street, traders sent stock prices tumbling and bond yields rising on fears that the Fed could delay rate cuts indefinitely. The broad S&P 500 stock index was down about 1% in late morning trading.

Chairman Jerome Powell has emphasized that Fed policymakers need to have more confidence that inflation is steadily slowing toward the target level before they will support a rate cut. Powell’s stance has raised the profile of monthly inflation data in determining when the Fed might start cutting rates. Lower interest rates would eventually lead to lower borrowing costs for companies and consumers.

Overall consumer prices rose 0.4% from February to March, the same as in the previous month. Compared to a year ago, prices rose 3.5%, up from a year-on-year figure of 3.2% in February.

The persistence of high US inflation complicates this Biden claims to be making steady progress at higher prices. The president has argued that further improvement could be possible if Republicans in Congress supported his policies.

“My agenda is to lower the costs of prescription drugs, health care, student debt and hidden junk costs,” Biden said in a statement.

President Joe Biden joins family caregivers, caregivers, educators and early childhood advocates to celebrate the progress made by care champions as he calls for additional legislative action during a rally at Union Station on April 9, 2024 in Washington, DC.  (Photo by Paul Morigi/Getty Images for Care Can't Wait Action)
President Joe Biden joins family caregivers, caregivers, educators and early childhood advocates to celebrate the progress made by care champions as he calls for additional legislative action during a rally at Union Station on April 9, 2024 in Washington, DC. (Photo by Paul Morigi/Getty Images for Care Can’t Wait Action)

Paul Morigi via Getty Images

The cost of owning a car was a major reason why prices rose last month: car insurance rose 2.6% in March and is up 22% from a year ago. That increase partly reflects the rise in new car prices over the past two years.

Average car repair costs rose 1.7% between February and March and are up 8.2% from a year earlier. And the price of gasoline to power most vehicles rose 1.7% last month. However, prices for new and used cars fell slightly.

Clothing costs rose 0.7% in March, the second month in a row of significant increases, although they have barely risen over the past year. However, food prices are unchanged over the past month and are only 1.2% higher than a year ago, providing some relief for consumers after the huge spikes in food prices in the previous two years.

Chronically elevated inflation so far this year suggests that, on average, U.S. consumers are confident enough to keep spending despite steady price increases, said Laura Rosner-Warburton, senior economist at consultancy MacroPolicy Perspectives. Likewise, she said, the increase in auto insurance and repair costs mirrors previous sharp increases in auto sales prices.

“It means consumers are in good shape and are still accepting the price increases,” Rosner-Warburton said.

Although inflation has plummeted since its peak of 9.1% in June 2022, average prices are still well above pre-pandemic levels. This has meant hardship for many lower-income families, whose wages may not have fully kept up with rising prices.

Derrick Chubbs, president of the Second Harvest Food Bank of Central Florida, said his organization is providing 300,000 meals a day, even more than the 250,000 it delivered in November 2022. He says the people his organization serves increasingly include homeowners. And most of them have jobs.

Chubbs said beneficiaries typically live paycheck to paycheck and are vulnerable to sharp changes in their financial circumstances. Most are still struggling to recover from increases in costs over the past three years, including in rents, childcare and car ownership – virtually a necessity in a region with limited public transport.

“If something throws them off, it’s going to take a while for them to recover,” Chubbs said. “Just because things are getting better doesn’t mean I’ve caught up on everything.”

AP writer Josh Book contributed to this report.