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Key Takeaways
- Inflation increased 3.4% over the year ending in the first quarter, far higher than the quarter prior, according to the government’s Gross Domestic Product report, which also showed the economy grew far less than analysts had expected.
- The inflation number hints at a higher reading for March’s Personal Consumption Expenditures report, which is set to be released Friday.
- Higher-than-anticipated inflation has already caused Federal Reserve officials to try to temper rate-cut expectations, and the conflicting signals in the GDP report could further complicate their decision on the path ahead.
Thursday’s report on the Gross Domestic Product (GDP) contained an ominous sign for inflation watchers.
Inflation rose at an annualized rate of 3.4% in the first quarter, up from 1.8% in the fourth quarter of 2023, the Bureau of Economic Analysis said in the GDP report Thursday. That figure incorporates Personal Consumption Expenditures (PCE) data on inflation from January and February, which have already been made public, and from March, which won’t be released until Friday.
Implications For Fed’s Preferred Measure of Inflation
Federal Reserve policymakers closely watch PCE as an indication of the trajectory of inflation. The high quarterly figure signals inflation either accelerated in March or the figures for previous months were revised upward, economists said.
PCE inflation could be as high as a 0.5% increase in March from February, compared to the 0.3% consensus forecast made before the GDP report, Economist David Rosenberg, founder of Rosenberg Research and Associates, posted on social media platform X.
If that prediction holds up, it would be the highest monthly inflation rate since January 2023.
Accelerating Inflation Further Complicates Fed’s Job
Either way, the overheating inflation gauge could discourage policymakers at the Federal Reserve from cutting interest rates any time soon.
Policymakers at the central bank maintained their projection of three rate cuts at their meeting in late March, but since then, inflation reports have shown price increases are remaining stubbornly persistent.
In response, Fed officials have attempted to walk back expectations of imminent rate cuts in public appearances over the last few weeks, with one going as far as to say rate hikes may be back on the table if inflation is not tamed.
This has left traders and economists skeptical of the potential for even one rate cut this year. Before the GDP report on Thursday, traders were anticipating an 87.4% chance that rates would be eased in December, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That number fell to 81.1% after the report.
“That is not the final nail in the coffin of rate cuts but does leave the Fed in a sort of monetary policy purgatory,” Diane Swonk, chief economist at KPMG posted on X.