The Consumer Price Index (CPI), a key measure of inflation, surged higher than expected in March.

The year-over-year increase of 3.2% exceeded the 3.1% forecast and significantly surpassed the Federal Reserve’s target of 2%.

Stripping out volatile food and energy prices, the “core CPI” rose even more sharply by 3.8%, beating expectations of 3.7%.

This surge marks the second consecutive month of unexpected price increases, raising concerns within the Federal Reserve.

Just two months ago, financial markets anticipated that the Fed would cut interest rates by about 170 basis points by the end of 2024.

However, the recent inflation data has caused a reassessment, with markets now expecting only around 70 basis points of cuts.

For over a year, a consistent pattern has emerged: the market predicts imminent interest rate cuts, but stronger-than-expected inflation data pushes those expectations further into the future.

The next critical data release is the Personal Consumption Expenditures (PCE) inflation report on March 29th, followed by the employment report on April 5th.

Many analysts believe that the labor data could be a turning point for the Fed.

If the upcoming employment report indicates continued weakness, it could support the market’s belief that interest rate cuts are imminent.

However, if the data remains mixed or shows signs of improvement, the Fed may maintain its current stance of cautious optimism, keeping the possibility of rate cuts in the future.

Inflation exceeds expectations

The year-over-year increase of 3.2% surpassed the Federal Reserve’s target of 2%.

Core CPI rises sharply

Excluding volatile food and energy prices, the ‘core CPI’ rose by 3.8%, exceeding expectations of 3.7%.

Market expectations shift

Recent inflation data has led the market to reassess its expectations for interest rate cuts, with only around 70 basis points expected now.