US CPI rises by 3.5% year-over-year, exceeding forecasts 

The U.S. consumer price index (CPI) increased more than expected in March amid a rise in the costs of gasoline and shelter, casting further doubt on whether the Federal Reserve will start cutting interest rates in June. 

The CPI, which covers a wide array of goods and services prices throughout the economy, increased by 0.4% for the month. This rise pushed the annual inflation rate to 3.5%, marking a 0.3 percentage point uptick from February, as reported by the Labor Department's Bureau of Labor Statistics on Wednesday.  

The U.S. central bank maintains a 2% inflation target. The measures it tracks for monetary policy are currently running considerably below the CPI rate. 

Economists polled by Dow Jones and Reuters had all maintained CPI forecasts of 0.3% for the month and 3.4% year-over-year. 

Core CPI also hotter-than-expected, rises 3.8% on a 12-month basis 

The core CPI, which excludes volatile food and energy prices, rose 0.4% on a monthly basis and 3.8% over the past year, exceeding predictions of 0.3% and 3.7%, respectively. 

The release of the report led to a downturn in stock market futures and a sharp rise in U.S. Treasury yields. 

The uptick in the overall index was primarily fueled by increased costs in shelter and energy. 

Energy prices went up by 1.1% following a 2.3% increase in February, and shelter expenses, which account for roughly one-third of the CPI's composition, rose by 0.4% for the month and 5.7% on an annual basis. Expectations for shelter-related costs to decelerate through the year have been central to the Fed’s thesis that inflation will cool enough to allow for interest rate cuts. 

US CPI report pushes back expectations of first interest rate cut to September 

The latest report comes with markets on edge and Federal Reserve officials voicing concerns over the immediate future of monetary policy.  

The central bank's policymakers have consistently emphasized the need for caution before any decisions on reducing interest rates are made, pointing out that there hasn't been sufficient proof of inflation moving steadily towards the Fed's annual target of 2%. The data from March further confirms worries that inflation may be stickier than previously believed. 

Market expectations had initially anticipated the Federal Reserve to begin lowering rates by June, forecasting three interest rate cuts within the year. However, following the report's publication, projections have shifted dramatically, with traders now projecting the first cut to occur in September, according to CME Group calculations. 

Analysts say June interest rate cut “off the table”, July cut “may be a stretch” 

″There’s not much you can point to that this is going to result in a shift away from the hawkish bent” from Fed officials, Liz Ann Sonders, chief investment strategist at Charles Schwab, told CNBC. “June to me is definitely off the table.” 

Despite the Fed’s expectations of a decline in services inflation throughout the year, the figure has remained stubbornly high. With energy excluded, the services index rose by 0.5% in March and was at a 5.4% yearly rate. 

Seema Shah, chief global strategist at Principal Asset Management, told CNBC said the reading may mean that a July interest rate cut could be “a stretch”: 

″This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip. In fact, even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the US election will begin to intrude with Fed decision making.” 

Markets.com Chief Market Analyst Neil Wilson voiced similar sentiments in his morning note on Wednesday: 

“Investors have been dialling back expectations for a June cut by the Fed – the market action yesterday suggests caution ahead of the number. The market is become less convinced the Fed will cut in June – but remember this is an election year and there are other factors at work”. 

The Federal Reserve is scheduled to release the minutes from its March meeting later on Wednesday, which is expected to shed further light on where the central bank officials stand on monetary policy.