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The numbers: Consumer prices rose a scant 0.1% in March largely because of lower energy costs, but U.S. inflation more broadly was still high and showed little sign of quickly subsiding.
Economists polled by the Wall Street Journal had forecast a 0.2% increase in the consumer price index. It was the smallest uptick in three months.
The yearly rate of inflation slowed to 5% from 6% and and touched the lowest level since May 2021. What helped was an extremely high inflation reading in March 2022 dropping out of the yearly rate.
More negatively, the so-called core rate of inflation that omits food and energy rose a sharper 0.4%. Wall Street had forecast a 0.4% gain.
Federal Reserve officials don’t ignore food and energy given their importance as household staples, but they view the core rate as a more accurate predictor of future inflation trends.
The increase in the core rate over the past 12 months moved up to 5.6% from 5.5%. These prices have fallen more slowly than the broader CPI and point to inflation remaining stubbornly high through most of the year.
Stock rose after the report and Treasury yields fell.
Key details: A nearly 5% decline in seasonally adjusted gasoline prices largely explains the soft headline reading on inflation.
Yet gas prices have risen again after OPEC said it would cut production last week, so the decline could be reversed in the April CPI report.
In a good sign, the cost of groceries fell for the first time since September 2020. Egg prices sank again, down almost 11%, as a huge increase in costs late last year tied to the bird flu continued to unwind.
Grocery prices are still 8.4% higher now compared to a year ago, however.
The cost of shelter rose sharply again, led by a 2.7% jump in hotel prices and 0.5% in rents. Housing is the single biggest category of the CPI.
Rents and home prices appear to be easing, however, and decelerating shelter costs are expected to show up in the CPI later in the year.
Prices of used vehicles, an early contributor to the runup in U.S. inflation, fell for the fifth month in a row. The cost of medical care also fell.
What the March CPI report shows more broadly is that the cost of goods have cooled considerably. Yet service prices — travel, recreation, transportation — still show lots of inflation and reflect a higher cost of labor.
That’s the Fed’s biggest worry.
Big picture: Inflation is gradually waning, but it’s still far too high for the Fed.
The central bank is expected to raise a key U.S. interest rate at least once more this year, likely in May or June, as part of a yearlong effort to temper inflation. Higher borrowing costs reduce price pressures by slowing the economy.
After that, the Fed is prepared to call a temporary halt to a series of interest-rate increases it’s orchestrated since March 2022 to see how the economy responds.
What’s given the Fed further pause is recent stress in the financial system after the failure of Silicon Valley Bank in March. U.S. banks lost tens of billions of dollars in deposits in the aftermath and have responded by offering fewer loans.
Chicago Federal Reserve President Austan Goolsbee said the Fed “should be careful about raising rates too aggressively” until it can determine “where these financial headwinds are going.”
Looking ahead: March’s CPI data provided further evidence that price pressures continue to fade in many pockets of the economy,” said senior economist Ben Ayers of Nationwide. “But inflation for services remained high and should keep overall inflation from falling considerably in the months ahead.”
“The Fed will take some comfort from calmer headline inflation,” said senior economist Sal Guatieri of BMO Capital Markets. “But services inflation remains stubbornly high, largely due to the tight labor market. Another 25 basis point rate hike seems likely on May 3.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open higher in Wednesday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
fell slightly to 3.37%.
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