Global financial markets have scaled back expectations for an imminent cut in interest rates on both sides of the Atlantic after figures showed US inflation rose by more than expected in March.
Figures from the US Department of Labor show a jump in fuel and housing rental costs drove up the consumer price index (CPI) to 3.5% in March compared with a year earlier, higher than expected by Wall Street economists.
In a development triggering a sell-off in financial markets, monthly inflation and core CPI – which removes volatile items including energy and food – also rose by more than predicted.
US government bond yields rose sharply, while shares fell in New York amid speculation that stubborn inflationary pressures could force the US Federal Reserve to delay cutting interest rates.
“Expectations for a June Federal Reserve interest rate cut have collapsed,” said James Knightley, chief international economist at the Dutch bank ING. “July is also doubtful, meaning September is the more probable start point of any easing, which would limit the Fed to a maximum of just three rate cuts this year.”
The figures also led traders to slash bets for the Bank of England to cut borrowing costs in June, amid concerns that inflation in the US and the UK could persist at higher levels than previously thought.
Financial markets are now pricing a 54% chance of the UK central bank keeping interest rates unchanged in June, having previously reflected a greater probability of a cut before the US inflation figures were released.
Inflation in the world’s largest economy has fallen sharply from a high of over 9% in 2022 but has remained stubbornly above the Fed’s target rate of 2%. Inflation in the UK has fallen from over 10% last year to 3.4% in February. Figures for March are due to be published next week.
The latest figures from the US show March’s increase was driven by rising costs for shelter and gasoline. “Combined, these two indexes contributed over half of the monthly increase in the index,” the labor department said. Gasoline rose 1.7% from the previous month and is 1.3% higher than the same time last year. Shelter is 5.7% higher than a year ago and rose 0.4% over the month.
Ryan Stewart, chief US economist at Oxford Economics, pointed out that gasoline prices typically rise this time of year. “But it still has economic costs as every $0.01 rise in retail gasoline prices reduces consumer spending between $1bn and $1.5bn over the course of a year,” he wrote in a note to investors.
The Fed increased its benchmark interest rate from near zero to over 5% over the last 16 months in a bid to cool inflation. Recently the central bank has held off on further rate rises and economists had expected rate cuts later this year. Those hopes have faded in recent weeks amid signs that inflation has remained sticky.