San Francisco Frontiers - US inflation slows in March but remains above Fed target

The rate of inflation year-over-year fell to 5.0 percent last month from 6.0 percent in February, the smallest 12-month increase since May 2021, according to the Bureau of Labor Statistics.

Still, several commentators noted that the inflation rate remains much above the Fed's two percent target, while adding that prices for gasoline and many household items stand above pre-pandemic levels, weighing on households.

The report showed a 0.1 percent increase in March over the prior month on a seasonally adjusted basis, much lower than the 0.4 percent reading in February and also below the 0.3 percent that had been expected by analysts.

But several analysts still expect the Fed to hike interest rates again next month, albeit by just a quarter percent point, smaller than several recent increases.

"The good news is that inflation continues to trend down, with prices increasing at their slowest pace since April 2021," said Neil Saunders, managing director of GlobalData Retail.

"However, this is not a complete win as prices are still going up," Saunders added. "This means many households continue to make choices about what and how to buy in order to balance their budgets. Inflationary behaviors are still prevalent among Americans."

- Food and energy -

Chief among the contributors to the milder inflation number was a significant drop in energy prices, offset by higher costs for housing.

Price hikes also accelerated in new vehicles and medical care commodities.

Food prices were flat in the quarter, with prices for meats, poultry and fish falling, while cereals, bakery products and nonalcoholic beverages climbed.

After years of anemic pricing pressure in the United States and other major economies, inflation roared back to life, beginning in 2021.

Key factors behind the resurgence included supply chain problems that crimped availability of key goods; generous government fiscal packages that kept demand elevated; and the Russian invasion of Ukraine, which increased volatility in the energy market and curtailed supply of some commodities.

In response to soaring inflation, central banks have undertaken a period of aggressive interest rate hikes, including in March, when the Fed and European Central Banks lifted rates again amid worries over banking industry instability.

- Troubling signs -

Despite the headline figure in Wednesday's report, analysts noted that when food and energy were stripped out, a "core" inflation reading remained troublesome.

Noting that core services increased in March from the prior month, FHN Financial's Chris Low predicted the latest data "will keep the Fed on its toes, supporting a May rate hike, and perhaps making the case the Fed should start thinking past the next meeting if it really wants to contain wage pressures."

Prestige Economics' Jason Schenker called the report "mixed," noting that the state of the core figures "bolsters the potential for additional rate hikes in the immediate term to ensure high inflation rates do not plateau and remain stuck at these levels."

Nonetheless, the report is the latest evidence that the Fed's streak of interest rate hikes over the last year is weighing on economic activity.

While US labor market data has remained solid, recent reports on manufacturing and the services sector have shown signs of slowing.

US equity markets rose modestly early Wednesday, with the S&P 500 gaining 0.4 percent.

Futures markets continued to bet that the Fed will again lift interest rates at its May 3 meeting, but not at a subsequent June meeting.

A note from Oxford Economics said the latest data keeps an interest rate hike "clearly on the table for May," but increases the odds of a pause in June.

Z.Sanchez--SFF