The CPI fell 0.3 percent in March. While a drop in energy was expected, core inflation fell 0.1 percent following a 7.0 percent drop in wireless telephone services and resumed weakness in core goods.

Energy Weighs on Headline, While Food Inflation Offers Respite

Consumer prices fell in March for the first time in more than a year. The CPI declined 0.3 percent versus expectations that price levels would remain flat. The drop last month brought the year-over-year pace down to 2.4 percent, which is still up meaningfully from the 0.9 percent pace registered this time last year.

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A drop in gasoline prices was the biggest contributor to the headline’s decline. Since, historically, gasoline prices rise in March (the last time they fell was in 2001), last month’s 1.1 percent increase translated to a seasonally adjusted decline of 6.2 percent. The cost of energy services, including electricity and utility gas services also declined in March.

Excluding energy, prices slipped 0.1 percent despite a rebound in food prices. Prices for food rose 0.3 percent last month, the strongest monthly gain since mid-2014. The recovery in food prices has been driven by a turnaround in food at home, which after falling for nearly every month since late 2015, have increased at a 2.8 percent annualized pace the past three months.

Drop in Core CPI: Talk Is Cheap

Also contributing to the soft March reading was a 0.1 percent drop in the core index, the first monthly decline in more than six years. A 7.0 percent decline in the cost of wireless telephone services alone shaved off 0.1 percentage point from the headline’s reading and led to a 0.1 percent decline in core services inflation last month. Shelter inflation also eased up a bit, increasing less than 0.2 percent for the first time in nearly three years. The slowdown stemmed from a drop in the relatively volatile lodging away from home component (down 2.4 percent last month), but also an easing in owners’ equivalent rent growth, which increased only 0.2 percent. Medical care services also slowed, rising 0.1 percent.

As we have previously written, the recent gains in core goods inflation looked unlikely to be sustained given what seemed to be some difficulty with seasonal adjustment at the start of the year. Core goods prices fell 0.3 percent in March, in part due to a 0.7 percent decline in apparel prices which look to be payback for strong gains at the start of the year. That said, new and used vehicle prices also fell last month and are likely to remain a source of weakness given the glut of vehicles coming off lease this year.

We suspect that the weakness in today’s core CPI print is not the start of a new trend given the curiously large drop in wireless services and some payback in the core goods component. Although the core index slipped to 2.0 percent year-over-year, we believe the Fed will look past this month’s weakness and continue to focus on the core PCE, which continues to drift higher.

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