In March, the Federal Reserve’s preferred inflation metric increased to 2.7%

US inflation rose to 2.7 per cent in the year to March, exceeding economists’ expectations and complicating the Federal Reserve’s plan to cut interest rates this year. The unexpected increase in personal consumption expenditures, the Fed’s preferred measure of inflation, has raised doubts among traders about a potential rate cut this summer.

“Inflation is hot, it’s getting sticky and more broad-based,” said Diane Swonk, chief economist at KPMG US. The rise in inflation was driven by higher petrol costs due to tensions in the Middle East pushing up oil prices.

The latest economic data is a setback for US President Joe Biden, who has emphasized the decline in inflation and the strength of the American economy. The White House’s National Economic Council director, Lael Brainard, highlighted the importance of ongoing efforts to lower costs in response to the report.

Futures traders are now only fully pricing in a quarter-point cut by the Fed’s meeting in November, just after the presidential election. US borrowing costs are at a 23-year high, with the PCE index consistently above the central bank’s 2 per cent goal since March 2021.

“We’re probably going to have sticky inflation from here,” said Tim Murray, a multi-asset strategist at T Rowe Price. Factors such as demand for chips, semiconductor materials for artificial intelligence, and clean energy are fueling price pressures.

The news of rising inflation has led to a sell-off in equity markets and a jump in Treasury bond yields. Despite the challenges, the S&P 500 index closed up 1 per cent, and the Nasdaq Composite closed 2 per cent higher, showing resilience in the face of economic uncertainty.