Another hot inflation reading reinforces that any near-term interest rate cuts are less likely as the Federal Reserve shifts to a higher-for-longer stance.

The Fed's preferred inflation measure — the "core" Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.8% year over year for the month of March. That was the same level as February but a tenth of a percent higher than expected.

Month over month, the measure of inflation rose 0.3%, which was in line with expectations.

"Today’s data means that it will take a longer string of months of good inflation data before the Fed will be comfortable with cutting," said Preston Caldwell, chief US economist at Morningstar.

Markets are pricing in only a 45% chance of the first rate cut in September after backing away from earlier predictions of a cut in March or June.

Before last week, investors were still looking at a rate cut in July, while now the odds are 66% that the central bank will hold rates steady that month.

Cutting rates in July "seems a bridge too far now, unless we see both inflation return to 2% in coming months along with a marked deterioration in the economic activity data," Caldwell added.

Fed Chair Jay Powell warned about today's PCE reading on April 16, saying he didn’t expect it to show progress and that measures of inflation on a three- and six-month basis are now more elevated.

The Fed chair also dialed back expectations for rate cuts anytime soon, saying it will take "longer than expected" to achieve the confidence needed to get inflation down to the central bank’s 2% target.

"Given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us," Powell said on April 16.

His comments marked a departure from previous assurances that the overall outlook had not changed much despite some hotter-than-expected readings in the first two months of the year.

But Luke Tilley, chief economist for Wilmington Trust, predicts rate cuts will only get pushed back to July instead of September, as he expects inflation to resume its drop and for the Fed to cut three times this year.

He chalked up the ascent at the start of 2024 to housing-related prices and seasonality.

Tilley underscored that inflation of 2.8% is still within the range of the central bank's 2.6% forecast for the end of the year.

"Powell said plenty of times last year that you have to start cutting before you get to 2%," said Tilley.

On a six-month annualized basis, core PCE inflation now stands at 3%, but the three-month measure has jumped up to 4.4%.

"I think it's getting a huge boost from that January [inflation] reading, which is really high and looks seasonal," said Tilley. "But it is enough for the Fed to be a little bit worried that you have a reacceleration going on here."

"This is far from ideal conditions" for the Fed, added Lindsey Piegza, Stifel Financial chief economist, on Yahoo Finance Live.

"This is going to complicate their outlook and possibly delay" any talk of near-term cuts, she said.

If inflation continues to surprise to the upside, Piegza predicts it will put a conversation about rate hikes "back on the table."

Correction: A previous version of this article misspelled the first name of Stifel's Lindsey Piegza. We regret the error.

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