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
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