The headline consumer price index (CPI) was down 0.1% (month-on-month) in March, as a 4.9% drop in gasoline prices weighed on the headline. But, favorable base effects took inflation up to 2.4% (year-on-year) – the highest reading in just over a year.
The 2.8% decline in energy prices contributed to the flat headline reading, as prices for food were up a modest 1.3% in March. Energy prices were still 7% higher than their year-ago levels in March.
As expected, core inflation rose 0.2% on the month, matching February’s pace. Also as expected, the year-on-year pace of core inflation jumped back up above 2.0% in March to 2.1%, as the drop in cell phone contract prices last year fell out of the year-on-year calculation.
Delving into the details, shelter inflation accelerated, up 0.4% on the month. While rent and owners’ equivalent rent were both up a sturdy 0.3% in March, lodging away from home prices popped back up after a period of weakness. Healthy increases were also seen for medical care (+0.4% m/m), personal care (+0.3% m/m) and motor vehicle insurance (+0.3%).
Areas of inflation weakness were found in lower prices for apparel (-0.6%), communication (-0.3%), used cars and trucks (-0.3%) and education and tobacco.
Overall inflation for core services now stands at 2.9% on the month, the fastest pace since March 2017. Core goods continue to be in deflationary territory (-0.3% year/year), but this downward pressure on overall core has been fading in recent months.
Key Implications
Now that the large drop in cell phone contract pricing last year has fallen out of the inflation calculation, core inflation is back above 2% for the first time in a year. We expect core inflation to continue to rise as a strong economy and wage pressures see price pressures increasingly percolate through the economy.
With the Fed’s 2% target in sight (the Fed’s preferred PCE metric isn’t quite there, but likely will be in the next few months) the question is how much more juice is still in the tank. Tax cuts and increased government spending present clear upside to near-term growth, but recent financial volatility and the threat of trade wars threaten to deflate some of the impact. This is the key question the FOMC is wrestling with as it calibrates the pace of rate hikes. We could get some insights on this score when the minutes from the March FOMC meeting are released later this afternoon. Stay tuned.
