Inflation eased in March as large declines in energy and transportation offset increases in food and rents.
The result was a decline in the consumer price index of 0.1% on the month and an increase of 2.4% over a year ago. The core CPI, which excludes the more volatile food and energy components, increased by 0.1% on the month and by 2.8% annually, according to the Bureau of Labor Statistics on Thursday.
March’s CPI report was the last clean set of data before the impact of wide-ranging tariffs is felt. The inflation data will provide cold comfort to Federal Reserve decisionmakers, who will look right through the top-line and core numbers as it awaits a springtime surge in inflation.
For those who think the March pricing data provides additional space for the United States to add tariffs, please think again. Such a move would only worsen the economic downturn that is already in train.
Look at the 0.1% decline in core goods prices because it is the last one that investors will see for a good period.
The data
The major catalysts for the decline in top-line pricing were a 2.4% drop in energy prices, which was fueled by a 6.3% drop in gasoline prices, a 1.8% decline in transportation costs as well as a 5.3% drop in airline fares.
While the drop in transportation costs was driven by a 0.7% decline in used car and truck prices, that will not be replicated because of the new trade taxes.
Services, which comprise 63.8% of the overall index, advanced by a modest 0.2% and were up by 3.7% from a year ago. Services remain the primary driver of inflation and are why in our estimation the underlying trend in inflation remains 3%.
Housing inflation was mixed with an overall increase of 0.3%. Shelter costs eased to a 0.2% increase, but the policy-sensitive owners’ equivalent rent series advanced by 0.4% on the month and by 4.4% from one year ago.
What might be a bit more friendly to the inflation outlook in the months ahead will be energy and gasoline prices as oil prices continue to fall.
What will be more interesting will be airfares, which will serve as a barometer of business demand for travel and the willingness of consumers to spend as the economy cools.
Read more of RSM’s insights on the economy and the middle market.
Food prices increased by 0.4% on the month and egg prices jumped by 6% monthly and by 60.7% annually.
Apparel prices increased by 0.4% on the month, medical care by 0.2%, education and communications by 0.3%, and other goods and services jumped by 1%. Recreation costs fell by 0.1% while commodity prices dropped by 0.4%.
The takeaway
Under normal circumstances, the March CPI report would ease investor concerns about the direction of inflation.
But given the nature of the trade shock that is coursing through the economy, the March inflation data provides an unambiguous signal that inflation will increase in the near term. That upward pressure on prices will keep the Fed on the sidelines for any rate cuts until the fall.
While energy, transportation and airfares offset price gains elsewhere, the cost of goods as well as sticky service costs and the owners’ equivalent rent series all point to an underlying pace of inflation that will not be moving toward 2% once one takes into account the likely increase in top-line inflation of 1% to 1.5% in the near term.
Investors and policymakers should anticipate top-line and core inflation to advance at a 4% to 4.5% pace by the middle of the summer.
