• Consumer prices slowed 0.1% MoM and 5.0% YoY in March

• Core CPI rises 0.4% MoM; up 5.6% YoY

• CPI inflation remains elevated for core services

• Persistent core CPI sets stage for one more hike

US inflation eased in March to its lowest level in nearly two years, but underlying  price pressures likely keep the door open for the Federal Reserve to consider  another interest-rate increase at its May meeting.

The consumer price index (CPI) increased just 0.1% MoM in March, the smallest  increase since last July. A reprieve in price growth for frequently purchased  necessities - energy and food - held the headline CPI to a more palatable gain and  provided consumers a little more wiggle-room in their March budgets. Prices for  gasoline declined 4.6% while energy services fell 2.3% last month. With the initial  surge in oil prices related to Russia’s invasion of Ukraine a full year behind us,  energy prices have turned to a drag on the year-over-year rate of inflation. Food  inflation also continued to moderate, with a flat reading in March pushing the yearago rate down to a still burdensome 8.5%. Yet, while there is likely some further  scope for energy services and food inflation to ease on a monthly basis in the near-term, the benefit to real incomes from lower gasoline prices is unlikely to carry  over to April, as prices at the pump have rebounded in recent weeks. Declining  inflation for food and energy have helped push the year-over-year rate of CPI  inflation down to 5.0%, the lowest reading since May 2021.

Excluding food and energy, however, inflation remains stubbornly high. Core CPI  rose 0.4% MoM in March and ticked up to 5.6% YoY. In a sign that the path to  quelling inflation will have some bumps along the way, goods prices, which have  been leading the charge on core CPI disinflation, rebounded to 0.2% MoM in  March (vs. 0.0% in February) - its largest monthly gain since August and the year-over-year rise (1.5%) was the fastest since December. The increased was traced  to somewhat firmer vehicle pricing; new vehicles rose by the most in three months,  while the 0.9% drop in used vehicle prices was the smallest decline in seven  months. Prices for core goods excluding vehicles continued its recent string of  strong 0.5% MoM increases.

Yet there is a whiff of relief coming on the services side of inflation. Core services  rose 0.4% in March, and the year-over-year rate of 7.1% - while still elevated - was the smallest increase since December. The much-awaited downward trend in  shelter inflation has finally seemed to arrive. Both owners’ equivalent rent (OER)  and primary rent, which together account for 41% of the core, rose 0.5% after  bouncing between monthly gains of 0.6%-0.8% for nearly a year. But softer services  prices extended beyond shelter. In contrast, prices for travel related services  climbed 2.5% for a second straight month, fuelled by strength in hotel prices  (+2.7%) and airfares (+4.0%) in a sign that consumers are still willing to shell out  for select discretionary purchases.

CPI inflation remains elevated for core services ex-housing, with prices rising 5.8% year on  year. The data indicate ongoing price pressure in labor-intensive services industries,  suggesting the Fed will need to cool the labor market to get inflation under control. The  CPI equivalent of the Fed’s now closely watched “super core”, rose 0.3% after 0.5% gains  in January and February. Driving the softer print was another decline in medical services  along with flat prices for recreational services.

Source: BIMB Securities Research - 13 Apr 2023