Increases in energy and transportation costs that were magnified by comparisons to last year’s economic downturn helped push the Consumer Price Index higher at an annual rate of 2.6% in March, according to government data released on Tuesday.
The increase in the CPI, which was 0.6% on a monthly basis, was widely expected because of the base effects of a year ago, when the economic shutdown led to steep declines in prices.
Energy prices in March rose by 5% on a monthly basis and by 13.2% year over year, while transportation costs rose by 2.7% on a monthly basis and by 5.8% on an annual basis. Inside the core measurement that excludes food and energy, inflation advanced by 1.6% year over year and by 0.3% on the month – figures that remain well behaved and in line with broader price stability.
A closer look at the data shows that prices are stable
In our estimation, it would be a mistake for policymakers, investors and firm managers to conclude that there is about to be a sustained and significant increase in the overall level of prices that results in diminished consumer purchasing power and thinner profit margins over the medium to long term.
Once the year-ago base effects run their course, one should anticipate that top-line metrics of inflation will ease back toward their long-term trends.
We urge our clients to beware of misleading narratives that confuse a cyclical increase in costs with a secular rise in prices.
We expect Federal Reserve officials to look right through the March data and much of the pricing data that will arrive over the next few months, just as they did in the 2010-12 period when the top-line CPI peaked at 3.9% in March 2011.
We urge our clients to beware of misleading narratives that confuse a cyclical increase in costs that one often observes coming out of recessions with a secular rise in prices that point to a permanent increase in the price level.
Rather, we expect broad disinflation linked to business failures on Main Street (39% of small firms that were open in January 2020 remain closed), an easing of rents inside the major metropolitan areas, downward pricing pressure linked to the broader digital transformation in the economy and similar downward pressure that will follow the reopening of currently constrained global supply chains
These factors will serve to dampen and in some cases offset the cost of goods used at earlier stages of production and intermediates that, excluding energy, are going to be the key drivers of rising prices this year.
Moreover, one typically observes an increase in productivity coming out of deep recessions — the pandemic has almost certainly unleashed the use of productivity-enhancing technology — to offset the increase in commodity costs. It is also important to note that it can take three to four years following such episodes for inflation to reach its trough.
Our preferred metrics of inflation CPI, rent of shelter, increased by 1.7% on a year-ago basis, and CPI services excluding rent and energy also increased by 1.7%. While both are off pandemic lows, these metrics, which account for pricing in the bulk of the economy, do not point to an immediate risk to the outlook linked to inflation. They reinforce our fundamental view that price increases this year will prove transitory.
Inside Tuesday’s report, energy and commodities advanced 8.95% and gasoline jumped 9.1%. Those increases were the primary drivers of the top-line 5% increase in energy costs. Services costs increased 0.4%, housing 0.3% and the owners’ equivalent rent increased 0.2% in March. Food and beverage costs increased 0.1% and apparel costs fell 0.3%. Medical costs increased 0.1%, recreation 0.4% and commodities 0.95%.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.