Consumer Prices Increase Across the Board in March
Rising in line with consensus expectations, both the headline and core Consumer Price Indexes increased in March, up 0.3 percent and 0.2 percent, respectively. At present, consumer inflation remains contained.
Broad-Based Strength in March
Following February's outsized 0.4 percent gain, the headline Consumer Price Index (CPI) rose 0.3 percent in March, as retail gasoline prices continued to increase, but at a much slower pace. Before seasonal adjustment, gasoline prices jumped 8.1 percent last month. That is roughly in line with the 27 cent/gallon price increase we saw in March to the monthly average of $3.97/gallon. However, once seasonally adjusted, gasoline prices increased just 1.7 percent on the month - a significantly slower pace than the 6.0 percent jump we saw in February. Elsewhere in energy, utility gas service prices (natural gas) surprisingly increased for the first time since September, up 0.9 percent. Partially offsetting these energy gains, electricity prices declined 0.8 percent. Turning elsewhere, food prices, which had remained unchanged in February, rose 0.2 percent on the strength of meats, poultry, fish and eggs. However, given the recent drop we have seen in agricultural commodity prices, we suspect that food price gains will be rather limited in the coming months.
Despite the recent monthly increase, the year-over-year change in the headline CPI slipped for the sixth-straight month to 2.7 percent, signaling consumer inflation remains contained as we proceed through 2012.
Core CPI Firms
Excluding food and energy, consumer prices edged up 0.2 percent in March on broad-based price gains. Following an unexpected slowing in February, owners' equivalent rent rebounded to its six-month average of 0.2 percent, while the rent of primary residence also increased a trend-like 0.2 percent.
Strength in the core was also seen in apparel prices, up 0.5 percent, following February's 0.9 percent drop, which reflected retailers discounting winter clothing due to the warm weather. Medical care, airfares and used cars and trucks also registered notable gains on the month.
Together, these increases were enough to push the year-over-year pace of core CPI inflation back up to 2.3 percent from 2.2 percent. Moreover, with the three-month annualized rate of the core CPI accelerating to a 2.2 percent pace from the fourth quarter's 1.9 percent pace, it is doubtful that core inflation will fall below the Federal Reserve's 2.0 percent target pace any time soon.
In regards to monetary policy, core inflation is rising slightly more than the Fed had projected and suggests to us that the bar for additional security purchases (QE3) remains quite high. The key question for policymakers is that if core inflation continues to accelerate this much in a slow growth economy with elevated unemployment, what will it do once economic growth gains traction and expands closer to trend?