U.S. consumer price gains slow; underlying inflation still hot

CPI rises 5.0% year-on-year; smallest gain since May 2021

April 12, 2023 08:47 pm | Updated 08:47 pm IST - WASHINGTON

U.S. consumer prices barely rose in March as the cost of gasoline declined, but stubbornly high rents kept underlying inflation pressures simmering, likely ensuring that the Federal Reserve will raise interest rates again next month.

The report from the Labor Department on Wednesday, however, had some encouraging news on rents, which increased at their slowest pace in nearly a year. Rents have been one of the main drivers of inflation in the past years. Food prices were unchanged last month, the weakest reading since November 2020.

"The Fed will take some comfort from calmer headline inflation, especially given that declining energy costs and now flat food prices will help to reduce inflation expectations," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

"But services inflation remains stubbornly high, largely due to the tight labour market." The Consumer Price Index (CPI) climbed 0.1% last month after advancing 0.4% in February. A 4.6% decline in gasoline prices was offset by higher rental costs. Gasoline prices are set to rebound after Saudi Arabia and other OPEC+ oil producers early this month announced further oil output cuts.

The cost of food consumed at home fell 0.3%, the first decline since September 2020. Egg prices tumbled 10.9%. Meat, fruits and vegetables were also cheaper. But prices for cereals and bakery products as well as nonalcoholic beverages increased. It also cost more to eat out.

In the 12 months through March, the CPI increased 5.0%, the smallest year-on-year gain since May 2021. The CPI rose 6.0% on a year-on-year basis in February.

The annual CPI peaked at 9.1% in June, which was the biggest increase since November 1981, and is subsiding as last year's large rises drop out of the calculation. Inflation by all measures remains more than double the Fed's 2% target.

Economists polled by Reuters had forecast the CPI gaining 0.2% last month and advancing 5.2% year-on-year.

The inflation data came on the heels of last Friday's employment report, which showed a solid pace of job growth in March and the unemployment rate falling back to 3.5%.

Persistently high inflation, labor market tightness and signs that financial market stress, wrought by last month's collapse of two regional banks, is easing should allow the Fed to continue prioritizing restoring price stability.

U.S. stocks opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

Relief coming

Financial markets are leaning toward the U.S. central bank increasing rates by another 25 basis points at the May 2-3 policy meeting, according to CME Group's FedWatch tool.

The Fed last month raised its benchmark overnight interest rate by a quarter of a percentage point, but indicated it was on the verge of pausing further rate increases in a nod to the financial market turmoil. It has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range.

Excluding the volatile food and energy components, the CPI increased 0.4% last month after rising 0.5% in February. While sticky rents continued to drive the so-called core CPI, relief appears to be on the way.

Owners' equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, rose 0.5%. That was the smallest gain since April 2022 and followed a 0.7% increase in February.

With independent measures showing rents on a downward trajectory, housing inflation is expected to continue subsiding this year. The rent measures in the CPI tend to lag the independent gauges.

Nevertheless, the disinflation road is likely to be bumpy, with pressure coming from the cost of services away from housing. The cost of services increased 0.3% after rising 0.5% in February. Services excluding shelter were unchanged after edging up 0.1% in the prior month.

Core goods prices gained 0.2% after being unchanged in February. There were increases in the prices of apparel and new motor vehicles, but used cars and trucks maintained their downward trend.

In the 12 months through March, the core CPI gained 5.6% after rising 5.5% in February. That ended five straight months of slower increases in the year-on-year core CPI.

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