Playing with matches

Inflation is running hot, hot, hot. But here’s what’ll happen next.

The big economic story of 2023 was America's painless disinflation. Pundits proclaimed that inflation was beat, a recession was imminent, and rate cuts were about to flow thick and fast. Alas, these talking heads were wrong. The economy is way hotter than they were ready for. Growth is strong, and prices are rising.

In fact, following a nasty surprise this week, some wonder if there will be any rate cuts this year. On Wednesday, the Bureau of Labor Statistics (BLS) reported that consumer prices rose 3.5% year-on-year in March. That's well above the Federal Reserve's 2% target rate and February's 3.2% rate. So, why did inflation come in above expectations? Shelter costs, an economist's word for the rent you pay your landlord or yourself if you own, are to blame. Rents and housing costs comprise more than one-third of the consumer price index (CPI) and have risen 5.7% in the past year. But what comes next?