U.S. Core Inflation Slows, but Only a Little Bit

A key measure of U.S. inflation showed hints of moderating in March, but likely not by enough to dissuade the Federal Reserve from raising interest rates again next month.

The core consumer price index (CPI)—which excludes food and energy and is closely watched by the Fed—rose 0.4 percent from the prior month, following a 0.5 percent gain, in line with economists’ estimates. Yet key measures of housing costs posted the smallest monthly increases in about a year and grocery prices dropped, the report from the Bureau of Labor Statistics (BLS) showed.

Investors initially reacted positively to the report before a rally in stocks and Treasuries cooled. Traders still largely bet on a 25 basis point (bps) rate hike at the Fed’s May meeting, while maintaining wagers the central bank will cut interest rates later this year.

Inflation, however, remains too high. The core CPI, which economists view as the better indicator of underlying inflation, was up 5.6 percent from a year ago. It’s the first time in more than two years that the core came in above the overall measure, which was up 5 percent.

That’s a sharp slowdown from the previous month because the figure is now compared with March 2022, when energy prices spiked immediately after Russia’s invasion of Ukraine.

The report offers glimpses of disinflation ahead, even while highlighting the sticky nature of inflation—particularly within the service sector. While policymakers are closely watching for any sign that the latest banking turmoil is weighing on the economy, brisk consumer price gains, paired with a still-strong labor market, are likely to lead the Fed to raise interest rates at least once more before what they say will be an extended pause.

“May should still tilt to a hike,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “But it does take some of the wind out of whether another hike in June will be needed at all.”

Speaking after the data came out, Richmond Fed President Thomas Barkin said policymakers still have more work to do to tame prices. However, he stopped short of saying whether he would support a rate hike at the Fed’s next policy meeting.

The details of the BLS report showed shelter costs rose at the slowest pace since November, though remained “by far” the largest contributor to the monthly advance, the report said. Grocery prices fell for the first time since 2020—including the biggest monthly drop in egg prices since 1987—while the cost of dining out continued to rise firmly.

So-called core goods prices, which exclude food and energy commodities, rose 0.2 percent, the most since August. That’s a divergence from late last year, when outright deflation in this category helped ease overall price pressures.

Used-car prices declined in March, while airfares, household furnishings, and motor-vehicle insurance all rose.

Energy prices fell 3.5 percent, reflecting declines in gasoline, natural gas, and electricity. However, the dip may prove to be short-lived after OPEC+ announced an oil production cut earlier this month. Pump prices are now at the highest since November.

What Bloomberg Economists Say…

“A strong disinflationary push is expected from shelter over the summer. Even so, given ongoing strength in the labor market and the OPEC+ cuts—as well as pressure from labor-intensive services industries—we expect the FOMC to hike rates by another 25 basis points when it meets next month.”

— Jonathan Church & Stuart Paul, economists

Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, climbed 0.6 percent. Housing-cost measures advanced at the slowest paces in about a year, while hotel prices jumped by the most since October.

Because of the way the housing metrics are calculated, there’s a significant lag between real-time price changes and the government statistics. Other metrics suggest these gauges will soon turn over, but economists are split on the exact timing.

Excluding housing and energy, service prices rose by a firm 0.4 percent, according to Bloomberg calculations. The metric was up 5.8 percent from a year earlier, the lowest in seven months.

Fed Chair Jerome Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, though they compute it based on a separate index. The Fed sees wage growth as one of the primary drivers of inflation in this category and is thus keenly attuned to any changes in a variety of pay metrics.

The minutes of the Fed’s March meeting, to be released later today, will offer more insight as to how policymakers balanced a string of bank failures with stubborn price pressures.

The latest jobs report showed the pace of earnings growth has slowed in recent months to a rate more consistent with the central bank’s 2 percent inflation target. That said, economists will be closely watching the employment cost index, which is viewed as a cleaner and more accurate measure of pay growth, and is due out later this month.

A separate report out Wednesday showed real average hourly earnings rose 0.2 percent in March, the first increase this year, and were down 0.7 percent from a year earlier.

The CPI is one of the last major releases the Fed will have in hand before its May meeting. In the coming weeks, policymakers will also scrutinize wholesale inflation and retail figures, as well as other data including inflation-adjusted consumer spending, the personal consumption expenditures price index, and the ECI.

—With assistance from Augusta Saraiva, Chris Middleton & Steve Matthews.

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