US Consumer Inflation Rises But Unclear If It’s Sustainable

Headline inflation rose sharply in March. The bond market yawned.

It’s still early for deciding if last month’s acceleration in the Consumer Price Index (CPI) is an early warning of things to come or a temporary detour in the long-running disinflationary trend. The Treasury market’s initial reaction, however, was hard to misread.

CPI at the headline level rose 2.6% on a year-over-year basis through March, the US Bureau of Labor Statistics reports. That’s a sharply faster pace over February’s 1.7% increase.

The bond market hardly seemed to notice. The benchmark 10-year Treasury yield slipped on Tuesday (Apr. 13), edging down to 1.64%, close to a one-month low. Why the muted response?

Perhaps because core CPI, which is a more reliable measure of the trend, posted a modest bump-up in its one-year change: 1.6% in March vs. 1.3% in February. Inflation picked up, but the core reading suggests that the underlying trend still reflects subdued pricing pressure. Indeed, a 1.6% core CPI rise still ranks well below the pre-pandemic 2%-plus pace and is also under the Fed’s 2% inflation target. In short, nothing much changed last month by this reading.

Some fixed-income managers are still waiting for convincing evidence of a material shift in the inflation outlook. “I’ve been managing bond portfolios for 25 years, through very large monetary programs, big deficits, and the Fed trying to raise inflation expectations,” says Janus Henderson’s Greg Wilensky. “As much as I can see legitimate reasons why it might happen this time — I could have said that very often over the last 12 years too.”

One reason for remaining skeptical that inflation’s set to run persistently hotter: the jump in headline CPI in March is largely due to two fleeting factors – so-called base effects. First, the year-over-year comparison is temporarily inflated by the brief bout of inflation last spring during the initial shock of the coronavirus. In turn, energy prices (oil in particular) collapsed. As those events wash out of the data, the inflation trend will stabilize — unless other factors intervene.

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Disclosures: None.

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