Key takeaways

  • The Consumer Price Index ticked higher in March, indicating that inflation remains stubbornly persistent.

  • Further evidence of sticky inflation provides little incentive for the Federal Reserve to begin cutting interest rates anytime soon.

Inflation’s stickiness continues, fluctuating in a range of 3% to 3.7% since June 2023, with the March Consumer Price Index (CPI) report showing an uptick in living costs. Inflation rose from 3.2% for the 12 months ending in February, to 3.5 % for the 12-month period as of the end of March.1

Of primary concern to investors is Federal Reserve (Fed) monetary policy, which has been focused on reducing inflation since early 2022. A steady decline of inflation through late 2023 led the Fed to raise the possibility of three federal funds rate cuts in 2024. But since the Fed first indicated in late 2023 that rate cuts were a possibility, it has affirmed more recently that it is in no rush to lower rates without more convincing evidence that the current inflationary cycle has slowed.

Chart depicts inflation trendline March 2021 – March 2024.
Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group, March 2024.

Over the past thirty years, inflation as measured by CPI has averaged 2.6% growth per calendar year. From 2000 through 2020, inflation never exceeded 4%, and in the previous decade (prior to 2021), living costs grew at a rate of 2% or less in most years. That changed in 2021, as inflation surged and Americans had to adjust to a different environment. In 2023, inflation began to return to what are more historically typical levels. The Federal Reserve Statement on Longer Run Goals articulates a long-term inflation target of 2%, as measured by the annual change in the personal consumption expenditure (PCE) price index.3

Inflation trends as measured by the Consumer Price Index 2000 - March 2024.
Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group, March 2024.

While higher costs for food and energy drove inflation’s surge in 2021 and 2022, those trends changed considerably in recent months, contributing to inflation’s slowdown. For the 12 months ending in March 2024, food costs rose just 2.2% while energy costs were up 2.1%. However, rising shelter costs are among the biggest contributors to February’s higher inflation. For the 12-month period, shelter costs are up 5.7%, with overall services costs up 5.4% over that time period.1 “Some of the ongoing inflationary pressure comes from continued healthy wage gains for workers,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “The strong labor market is certainly contributing to the economy’s strength and inflation’s persistence.”

As the inflation environment evolves, investors may be asking:

  • When will inflation drop to the Fed’s 2% target?
  • Are there risks that inflation could trend higher again?
  • How should I position my investments given current inflation dynamics?


Looking beyond the headline numbers

Inflation is a primary focus for the Fed. As the country’s central bank, the Fed’s mandate is to promote full employment, stable prices and moderate long-term interest rates. Beginning in early 2022, the Fed raised the short-term interest rate it controls, the federal funds target rate, 11 times in an effort to slow the economy and lower inflation. One important measure the Fed monitors is “core” inflation (excluding the volatile food and energy sectors). In March 2024, core inflation rose 3.8% for the previous 12-month period, comparable to February’s reading, and, like the headline CPI number, little changed since mid-2023.1 While it’s the lowest level for core inflation since May 2021 and down significantly from its 6.6% peak in 2022,2 core inflation remains well above the Fed’s 2% annual target.

Chart depicts trailing 12-month Core Consumer Price Index (CPI), a measure of inflation, 2021 - March 2024.
Source: U.S. Bureau of Labor Statistics, U.S. Bank Asset Management Group, March 2024.

“The Fed is very much focused on inflation exclusive of food, energy and shelter costs,” says Haworth, “and is also closely monitoring the pace of wage growth, which remains elevated.”

It isn’t just CPI that remains elevated. In March, the Producer Price Index (PPI), measuring wholesale costs for raw, intermediate and finished goods, jumped up. PPI for the 12 months ending in March rose 2.1%, its highest reading in nearly a year, a sign that inflation trends are not moving in the right direction.4

The Fed’s preferred inflation gauge, the PCE price index, is a measure of the spending on goods and services. The latest inflation figures again offered little encouragement for investors eager for the Fed to begin cutting rates. The headline PCE index ticked up to 2.5% for the one-year period ending in February 2024 (compared to 2.4% in January), and the narrower “core” PCE (excluding the volatile food and energy categories) rose 2.8% over the same period, a slight drop from January. Again, both numbers are well above the Fed’s long-term 2% target.5

“To this point, the Fed remains firm that it wants to see inflation down to its 2% target,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management.

“To this point, the Fed remains firm that it wants to see inflation down to its 2% target,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. Freedman says inflation’s “stickiness” makes the Fed somewhat cautious about when it begins cutting interest rates. Given inflation’s persistence in the 3% range and an economy that has proved resilient despite higher interest rates, “There’s enough cover right now for the Fed to sit tight,” says Freedman.

The fed funds target rate, managed by the Fed’s policy-making Federal Open Market Committee (FOMC), is 5.25% to 5.50%, up from close to 0% as recently as two years ago. The Fed has maintained the target rate at that level since July 2023. In that time, bond yields rose commensurately across the board. The benchmark 10-year U.S. Treasury note stood at 4.98% on October 18, then fell below 4% in late December as investors began to anticipate Fed rate cuts. However, 10-year Treasury yields have now moved firmly above 4%. “The markets began to anticipate an early start to Fed rate cuts in 2024,” says Haworth. After the March 2024 FOMC meeting, Fed chair Jerome Powell said the FOMC “does not expect it will be appropriate to reduce the (fed funds) target range until it has gained greater confidence that inflation is moving sustainably down toward 2%.”6 The latest data appears to dampen expectations for interest rate cuts until later in the year.


How inflation can impact your portfolio

At a time when inflation began to slow from its peak in mid-2022, stocks performed better. In early 2024, the S&P 500 stock index reached new highs. While bond yields are below peak levels reached in October 2023, the bond market continues to offer attractive yields for long-term investors. Although yields on some shorter-term securities exceed yields of some longer-term bonds, Haworth says investors should consider placing more emphasis on their ultimate portfolio goals. “It may be an appropriate time to move money out of short-term vehicles and focus on positioning your portfolio in assets, such as stocks and longer-term bonds, that can help you achieve your ultimate financial objectives in the years to come.”

“We may not yet be seeing the massive disinflationary environment many are looking for,” says Freedman, “but’s it’s still an environment where we think you can own stocks, as opposed to getting more bearish.”

Haworth says as long as inflation stays sufficiently high to prevent the Fed from cutting interest rates, it puts some sectors at a disadvantage. “There are certain segments of the stock market hurt by higher interest rates, such as utility and real estate stocks,” says Haworth. He notes, however, that the stock market as a whole has been on an upswing since late 2022. “In general, stock markets can perform well in either a high or low-rate environment, but it is periods of transition from one environment to the next that can cause more significant price swings.”

The bond market is affected by inflationary news as well, since bond yields, over time, tend to track with inflation. “The bond market has to factor in what the Fed’s reaction is going to be as the economy remains robust,” says Haworth. “And that’s higher interest rates for longer, which opens the door to higher bond yields across the board.”

Generally, a consistent long-term strategy tends to work to the benefit of most investors. This likely precludes any dramatic changes to your asset allocation strategy in response to persistently elevated inflation.

Be sure to talk with your financial professional about what steps may be most appropriate for your situation.

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  1. U.S. Bureau of Labor Statistics, “Consumer Price Index Summary, March 2024,” April 10, 2024.

  2. U.S. Bureau of Labor Statistics, “12-month percentage change, Consumer Price Index.”

  3. Board of Governors of the Federal Reserve System, “2020 Statement on Longer-Run Goals and Monetary Policy Strategy,” Aug. 27, 2020.

  4. U.S. Bureau of Labor Statistics, “Producer Price Index News Release summary, March 2024,” April 11, 2024.

  5. U.S. Bureau of Economic Analysis, “Personal Income and Outlays, February 2024,” March 29, 2024.

  6. Federal Reserve Board of Governors, “Transcript of Chair Powell’s Press Conference,” March 20, 2024.

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