Upticks in the cost of shelter and gasoline were the primary drivers behind an unexpected increase in U.S. inflation in March, which rose .4% for the month and hit a 3.5% annualized rate according to a federal report released Wednesday.

The U.S. Labor Department’s Consumer Price Index Summary for March reflected much the same dynamic that drove a February inflation increase. Gasoline prices rose 1.7% over February and were up 1.3% over the past 12 months. The cost of shelter, which includes a metric that estimates how much rent an owner would earn from their home, bumped up .4% month over month in March and is up 5.7% from this time a year ago. Changes in shelter costs have an outsized impact on the CPI calculation, accounting for about 40% of the overall measurement.

Mountain West states, which include Utah, had the lowest regional inflation in the country in March at 2.5% over the last 12 months, according to the report.

Grocery prices in March held steady over the previous month but are up 1.2% since the same time last year, while the cost of food away from home rose .3% on a monthly basis and is up 4.2% over the last 12 months.

Core inflation, which strips out volatile food and energy prices, rose .4% on a monthly basis in March, matching the increases over the first two months of the year and hitting a 3.8% annual rate.

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How will Fed react to inflation spike?

The new data is likely to incentivize the Federal Reserve to continue to hold off on cuts to its benchmark federal funds rate which remains in the 5.25% to 5.5% range, the highest in decades. While the Fed has indicated a series of reductions will happen this year and likely to come in .25% increments, Federal Reserve Chairman Jerome Powell has been steadfast in saying that officials want to see more evidence that inflation is under control and ticking toward the body’s goal of a 2% annual rate.

At the conclusion of the Fed’s March meeting, Powell said it wasn’t clear if the surprise inflation increases in the first two months of the year are a “bump on the road or something else” but otherwise sounded optimistic about where the economy is headed.

“In the meantime, the economy is strong, the labor market is strong, inflation has come way down and that gives us the ability to approach this question carefully,” Powell said at a press conference on March 20.

Interest rate adjustments are the Fed’s primary weapon in an ongoing battle against the elevated prices of consumer goods and services. While the monetary body has paused making any rate adjustments since its July 2023 meeting, it had imposed 11 increases going back to March 2022, the most aggressive series of rate hikes in decades.

The rate increases raise the cost of debt for businesses and consumers, a move that aims to reduce the amount of spending and overall economic activity. That shift in dynamics typically leads to lower inflation rates.

In a Wednesday note on the new inflation data, Seema Shah, chief global strategist at Principal Asset Management, predicted the Fed will continue its pause on rate adjustments.

“Today’s crucial CPI print has likely sealed the fate for the June (Fed) meeting with a cut now very unlikely,” Seema said, per a report from CNN. “Even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the U.S. election will begin to intrude with Fed decision-making.”