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The latest data from the Labor Department reveals that U.S. inflation slowed to its lowest level in almost two years in March. However, underlying price pressures persist, indicating that the Federal Reserve may consider another interest-rate increase at its May meeting. The consumer-price index, which measures the cost of goods and services paid by consumers, rose 5% last month compared to the previous year, marking a decrease from February’s 6% rise and the smallest gain since May 2021.
According to the report, consumers witnessed lower prices for groceries, gasoline, medical care, and utilities, while prices for shelter, airline fares, and insurance remained high. While stocks were mixed following the report, bond yields declined.
Despite this decrease in inflation, it remains high and well above the average of 2.1% in the three years before the pandemic and the Federal Reserve’s 2% target. Core prices, which exclude volatile energy and food categories, increased by 5.6% in March from the previous year, slightly up from the prior month’s 5.5%. Economists see core inflation as a better predictor of future inflation, and it has remained high due to inflationary pressures from shelter costs.
The CPI increased by 0.1% in March from the previous month, a significant decrease from February’s 0.4% increase, while core CPI rose by 0.4%, slightly down from 0.5%.
Despite the possibility of the economy entering a recession later this year, Fed officials have signaled that they may raise interest rates at their next meeting due to high inflation and a tight labor market. They have raised interest rates nine times in the past year to tame inflation as the economy rebounded from the pandemic during supply-chain disruptions and labor shortages. The benchmark federal funds rate now ranges between 4.75% and 5%.
To determine whether to raise rates again in May, Fed officials will pay close attention to measures of economic activity, including lending conditions after banking-system stress.
Economists like Steve Blitz, chief U.S. economist at TS Lombard, believe that the inflation problem will not solve itself and will require higher unemployment. The International Monetary Fund estimates that tighter lending following two recent midsize bank failures will slow growth this year.
The labor market slowed slightly in March, with hiring gains moderating, wage growth easing, and job openings dropping, indicating that worker demand is softening. Consumer spending, the primary growth driver, rose more modestly in February.
Grocery prices dropped in March, marking the first one-month drop since September 2020. Egg prices surged last year due to an Avian-flu outbreak and saw the most significant single-month drop since 1987. Gasoline and residential natural-gas prices also dropped, while new auto prices rose and used auto prices fell.
