Inflation Eases In March, But Still Way Too High
The Labor Department reported yesterday that US inflation as measured by the Consumer Price Index eased to an annual rate of 5% in March from a year earlier, its lowest level in nearly two years. But underlying price pressures remained elevated despite the Federal Reserve’s campaign to slow rapid price increases.
Core prices, a measure of underlying inflation that excludes volatile energy and food categories, increased 5.6% in March from a year earlier, accelerating slightly from 5.5% the prior month. Core inflation, which economists see as a better predictor of future inflation, has stayed stubbornly high in part because of inflationary pressures from shelter costs.
Last month’s rise in the Consumer Price Index (CPI), the closely watched inflation gauge that measures what consumers pay for goods and services, was lower than February’s 6% increase and the smallest gain since May 2021, the Labor Department said Wednesday. Households saw higher prices for food and shelter, and lower prices for gasoline and used vehicles.
CPI inflation reached a peak of 9.1% last year in large part because Russia’s invasion of Ukraine temporarily upended global oil markets. Inflation has slowly receded since then, and most forecasters expect it will continue to fall slowly in the months ahead – but probably not as much as the Fed wants.
While the lower inflation reading for March was welcomed, it will not change the Fed’s interest rate policy, as inflation still remains well above the Fed’s target of 2%. The Fed has raised interest rates nine times over the past year to cool the economy and tame inflation, which shot up as the economy rebounded from the pandemic during supply-chain disruptions and labor shortages.
Inflation remains elevated—well above the 2.1% average in the three years before the pandemic and the Fed’s 2% target.
Housing costs were by far the largest contributor to the monthly price increase in March, more than offsetting a 3.5% drop in the energy index. Rents rose 0.5% in March, though that was a slower pace than the previous month.
Car insurance (up 1.2%), airfares (up 4%), household furnishings (up 0.4%) and new vehicles (up 0.4%) all saw increases in March.
Energy costs are down significantly from a year ago — which was right after Russia invaded Ukraine and upended global energy markets. That helped the overall inflation number tick down a full percentage point.
Costs for medical care and used cars and trucks fell 0.3% and 0.9% over the month, respectively. Compared to last year, used car prices are down 11%.
Average gas prices have fallen since surging past $5 a gallon last year, but they could be on the upswing again after Saudi Arabia and other leading oil producers said they would slash output by more than 1 million barrels a day starting in May.
Inflation is trending in the right direction, and March marked the ninth straight month of easing after last year’s spike. But consumer prices remain well above normal levels, and a hodgepodge of data makes it difficult to gauge whether the economy is slowing enough. The labor market is still churning, for example, but at a slower pace. Americans pulled back on spending in February, but consumers spent more heavily in January than they had in December.
The Fed has recently focused its attention on inflation coming from the services sector, such as leisure, hospitality and healthcare. The concern there is that labor shortages are putting pressure on wages, as hospitals are desperate to hire nurses and as hotels are stretching to meet spring and summer travel. That drives up prices, in turn, as companies charge more to cover higher labor costs.
Then there’s the energy sector. Gas prices are expected to jump again after the oil-producing bloc known as OPEC Plus announced plans to significantly slash production. The average gallon of gas in the United States cost $3.62 on Wednesday, according to AAA, and some analysts expect that if demand picks up over the summer, drivers could see prices at the pump pass $4 again later this year.
The bottom line is while inflation has moderated from last year’s high, it is still nowhere near the Fed’s target of 2%. While I don’t expect the Fed will be successful in getting inflation back to 2%, I look for the Fed to raise its key short-term interest rate at least two more times at its upcoming policy meetings. The next two Fed policy meetings are on May 2-3 and June 13-14. I expect another quarter-point rate increase at each of those meetings.
It remains to be seen if the Fed will pause its interest rate hikes after that and watch to see if inflation continues to fall.
More By This Author:
Nervous Depositors Pull Money From Regional BanksMost American Cities In Decline – This Should Not Be News
Inflation Is Falling, But Maybe Not Fast Enough For Fed