U.S. March CPI Comes in as Expected

• March 2012 consumer prices rose an expected 0.3% in the month, which was down from a 0.4% gain in February.
• Gasoline prices rose 1.7% in the month although this represented moderation from a 6.0% rise in February.
• Core prices also came in as expected by rising 0.2% in the month.
• The annual increase in the overall CPI moderated to 2.7% in March from 2.9% in February although the core rate rose slightly to 2.3% from 2.2% during the same period.
• The annual increase in core prices has remained above 2% during the first quarter of this year as was the case for in the final quarter of 2011. Looking ahead, our view remains that the still-high unemployment rate and implied slack in labour markets will see the inflation rate fall below this threshold in the course of this year. Such a result would keep Fed policy geared to sustaining the recovery with the fed funds rate likely to remain in its current highly stimulative range of 0% to 0.25% into 2014.

Expectations for the March 2012 consumer price index (CPI) report were for a slight moderation in both the monthly increase and the year-over-year increase based on indications of a lessening effect from gasoline prices. Such a result was confirmed in this morning’s report. The monthly increase moderated to 0.3% in March from 0.4% in February, which largely reflected the increase in gasoline prices moderating to 1.7% from 6.0% during this period. On a year-over-year basis, the overall inflation rate moderated to 2.7% from 2.9%.

Excluding food and energy prices, the so called core measure rose an expected 0.2% in March, which was up slightly from a 0.1% gain in February. The upward pressure was led by a sizeable 1.3% increase in used cars in the month. This result followed a 0.2% drop in February and represented the first increase in this component in seven months. Apparel prices also showed a sizeable increase of 0.5% although this only partially offset a 0.9% drop the previous month. Higher fuel costs were likely a factor pressuring airline fares in March up 0.4% following a 0.1% drop in February.

On a year-over-year basis, the core CPI measure was up 2.3% compared to 2.2% in February. For the first quarter of 2012, core inflation was up 2.2% and unchanged for the fourth quarter of 2011 rate.

An easing in the pace of energy price gains helped moderate the increase in the overall CPI both in the month and in the past year. The annual increase in core prices, however, remains above 2% during the first quarter of this year, as was the case for the final quarter of 2011. Looking ahead, our view remains that the still-high unemployment rate and implied slack in labour markets will see the core inflation rate fall below this threshold in the course of this year. Such a result would allow the Fed to focus on sustaining the recovery with the fed funds rate likely to remain in its current highly stimulative range of 0% to 0.25% into 2014.