Unexpected inflation drop sparks interest rate cut hopes
March inflation data in the U.S. was lower than economists had forecast. Instead of the predicted increase of 0.1% on a monthly basis, consumer prices fell by 0.1%. On an annual basis, the inflation rate dropped to 2.4% from February's level of 2.8%.
Core inflation, excluding volatile energy and food prices, showed a minimal increase of 0.1% monthly and 2.8% annually. This is the lowest annual reading of this indicator in over three years. The overall index decline was mainly influenced by a 2.4% decrease in energy prices on a monthly basis, with gasoline prices falling by 6.3%. Meanwhile, food prices rose by 0.4%, with the largest increases in the category of food products purchased for home consumption.
Impact on monetary policy and market expectations
Analysts from the Portu investment platform point out that "such a reading may bolster market expectations regarding the start of a cycle of interest rate cuts by the Federal Reserve, especially in the context of weakening economic dynamics and increasingly visible signs of a slowing job market." According to their assessment, investors currently anticipate three to four interest rate cuts by the end of the year, and the latest data may further validate this scenario.
Despite optimistic readings, the inflation outlook remains uncertain. Experts at Portu highlight that "the key unknown remains the further development of the trade policy situation." It's important to note that the March inflation report reflects the state of the economy before the latest trade decisions, suggesting the current situation may already look different.
Trade tensions as a potential threat
The current pause in the imposition of tariffs by the American administration is only a temporary suspension, not a complete withdrawal from this policy. Tensions between Washington and Beijing continue to escalate, and the effects of higher tariffs on products from China may already be visible in the April inflation data.
Analysts at Portu predict that "the Fed may have more room for easing, but it will proceed cautiously." This implies that despite decreasing inflation rates, the U.S. central bank will likely remain cautious in deciding on interest rate cuts, taking into account the uncertainty surrounding trade policy and its potential impact on the economy.
