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HIGHLIGHTS:
- March sees U.S. inflation plunge to nearly two-year low.
- Fed may mull over interest-rate hike in May amid underlying price pressures.
- Consumer-price index records 5% rise, a drop from February’s 6% surge.
- Mixed stock reactions and falling bond yields follow inflation report.
- Stubborn core inflation persists, driven by shelter-cost inflationary pressures.
The Labor Department’s latest data shows U.S. inflation reaching its lowest point in almost two years in March. Nevertheless, persistent underlying price pressures could prompt the Federal Reserve to contemplate another interest-rate hike at their May meeting. The consumer-price index (CPI) rose 5% in March, year over year, a decrease from February’s 6% surge and the lowest increase since May 2021.
The report indicates consumers experienced lower prices for groceries, gasoline, medical care, and utilities, while shelter, airline fares, and insurance costs remained high.
Inflation is still well above the pre-pandemic average of 2.1% and the Fed’s 2% target. Core prices, excluding volatile food and energy sectors, climbed 5.6% in March year over year, marginally up from February’s 5.5%. Shelter costs continue to fuel high core inflation.
CPI grew 0.1% in March, compared to February’s 0.4% increase, while core CPI rose 0.4%, down from 0.5%.
High inflation and a tight labor market could lead Fed officials to raise interest rates at their next meeting despite potential recession threats. In the past year, they have increased rates nine times to combat inflation amid supply-chain disruptions and labor shortages. As a result, the benchmark federal funds rate now ranges between 4.75% and 5%.
Fed officials will closely monitor economic activity, including lending conditions after banking-system stress, to decide whether to raise rates again in May.
Economists like Steve Blitz of TS Lombard argue that the inflation issue won’t resolve itself and will necessitate higher unemployment. The International Monetary Fund estimates that tighter lending following two midsize bank failures will slow growth this year.
March saw a slight labor market slowdown, moderating hiring gains, easing wage growth, and dropping job openings, signaling softer worker demand. Consumer spending growth was more modest in February.
Grocery prices dipped in March, the first one-month drop since September 2020. Egg prices skyrocketed last year due to an Avian-flu outbreak and saw the most significant single-month decline since 1987. Gasoline and residential natural-gas prices fell, new auto prices climbed, and used auto prices decreased.
