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Wall Street woke up to a nasty surprise this morning: Fueled by rising rents and gas prices, U.S. inflation rose slightly to 3.2% year-over-year last month, according to Bureau of Labor Statistics data<\/a>. After a two-year-run of interest rate hikes to combat rising inflation, the Street is expecting the Fed to begin cutting interest rates later this year.<\/a> This uptick in inflation would seem to throw cold water on that narrative, but the headline number doesn\u2019t tell the full story, top economists say. While the so-called hot inflation rate might give the Fed more cause for caution,<\/a> it likely won\u2019t change the central bank\u2019s long-term plan, according to analysts.<\/p>\n \u201cGiven that the market had already taken the odds of a March rate cut down to near-zero, today\u2019s firmer-than-expected CPI report doesn\u2019t dramatically shift the near-term market narrative,\u201d Elyse Ausenbaugh, global investment strategist at J.P. Morgan Global Wealth Management, wrote in an email to Fortune.<\/em><\/p>\n Analysts told Fortune <\/em>that they\u2019re chalking the 0.4% monthly rise in core inflation, which excludes volatile commodities like food and energy, up to \u201csticky\u201d prices that lag a few months behind where the economy actually is. And services inflation that drove January\u2019s disappointing report<\/a>, encompassing costs of transportation, medical care, and education, fell by 45% month-over-month and appears to have stabilized.<\/p>\n \u201cInflation is moving more sideways than down, perpetuating elevated price sensitivity among consumers and challenging the Fed\u2019s progress toward its 2% target,\u201d wrote Kayla Bruun, senior economist at Morning Consult, in an email to Fortune.<\/em><\/p>\n Today\u2019s inflation data is basically telling investors what they already knew: the Fed almost certainly won\u2019t be cutting rates later this month, and markets will likely have to wait until June or beyond to expect any interest-rate relief from the central bank.<\/p>\n \u201cWhat does the Federal Reserve take away from this? Mainly, it will be looking for more data \u2026Officials have said they can afford to be patient as they consider when and if to cut rates. They\u2019d feel more comfortable about rate reductions if inflation were to be less sticky,\u201d wrote Bankrate Senior Economic Analyst Mark Hamrick in an email to Fortune.<\/em> \u201cThe slightly stronger than expected CPI doesn\u2019t do much to add to their confidence, but they can still ponder the possibilities for May, June, and July.\u201d<\/p>\n Shelter and gasoline costs alone drove 60% of overall inflation last month, per the BLS<\/a>. After rising 0.4% last month, though, food prices stayed level for the first time since April 2023\u2014and prices for certain products, such as fruits, vegetables and dairy, decreased.<\/p>\n Lawrence Yun, chief economist for the National Association of Realtors, noted in a statement that the \u201cheavyweight component\u201d of housing\/shelter decelerated to 5.7%, which kept the overall CPI above the 2% target, although lower rent growth is implied from a range of unofficial private sector data. \u201cThe latest data does not fundamentally change what the Fed will likely do \u2013 3 rate cuts this year.\u201d<\/p>\n The Fed will meet to discuss interest rates next week<\/a>, and this report will certainly be on its mind. Fed Chair Jerome Powell said last week that the Fed was \u201cnot far\u201d from being convinced that inflation was on track to reach the Fed\u2019s 2% target, which could usher in rate cuts. But this month\u2019s small headline bump means the Fed will probably be looking for more confirmation the economy\u2019s on the right track.\u00a0<\/p>\n \u201cFed Chair Jerome Powell stated that he wants to have \u2018greater confidence\u2019 in the trajectory of inflation before instituting a rate cut. Since goods prices have already been deflationary, we think the remaining room for progress lies mainly in core services,\u201d wrote Gargi Chaudhuri, Head of iShares Investment Strategy for the Americas at BlackRock<\/a>, in an email to Fortune.<\/em><\/p>\n Markets overall are predicting a 60% chance of the first rate cut coming in June, according to Rob Swanke, Senior Equity Analyst at Commonwealth Financial Network.\u00a0<\/p>\n \u201cOur base case is that the first Fed cut comes in June, and we have three more CPI and three more PCE inflation prints until then,\u201d wrote JPMorgan\u2019s Ausenbaugh.<\/p>\n<\/div>\n\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n