The US consumer prices index (CPI) rate of inflation rose to 8.5% in March, official data revealed on Tuesday.
This was an increase from 7.9% in February and slightly above a consensus forecast compiled by Bloomberg which had predicted a reading of 8.4%.
“The Fed will be pressing firmly on the brake pedal — not just pumping the brakes — in an effort to slow demand and bring the inflation rate back down,” said Greg McBride, chief financial analyst at Bankrate.
On a monthly basis, CPI rose 1.2%, compared to 0.8% in February. Excluding food and energy, the so-called core CPI inflation measure rose by 6.5% from a year ago (consensus: 6.6%), versus 6.4% in February.
Rob Clarry, Investment Strategist at Tilney Smith & Williamson, the leading wealth management and professional services group which is set to re-brand to Evelyn Partners in the summer, said, “As expected, US consumer prices have continued to rise rapidly. Domestically, strong consumer demand and a tight labour market are contributing to elevated inflation. Additionally, ongoing strains in global supply chains and the impact of the Russian invasion of Ukraine have led to high levels of imported inflation.
On the face of it, this reading does little to change the hawkish stance taken by the Fed in recent months. The minutes from the March Federal Open Market Committee (FOMC) meeting were published last week, with the committee judging that it “would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously”.
In our view, this increases the probability that we will see 50 basis points hikes in the coming meetings. It also looks like the Federal Reserve will launch its quantitative tightening programme in May, which will see the Fed reduce the size of its balance sheet. This combination of higher interest rates and balance sheet reduction is likely to lead to slower economic growth next year.
Despite these inflationary pressures and tighter monetary policy, we are still expecting US GDP growth to remain above-trend this year. This will support company earnings, with analysts continuing to forecast robust growth. Moreover, the US economy is less exposed to the Russia-Ukraine war than the Eurozone, which should help it to outperform from a growth standpoint in the second half of this year.
Above-trend growth, strong earnings, and relatively attractive pricing is why we favour equities over bonds at this moment in time.”