US Core Inflation Slows Only a Bit, Keeping Fed on Track to Hike

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(Bloomberg) — A key measure of U.S. inflation showed hints of moderation in March, but it likely won’t be enough to dissuade the Federal Reserve from raising interest rates again next month.

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The core consumer price index — which excludes food and energy and is closely watched by the Fed — rose 0.4% from the previous month after rising 0.5%, in line with economists’ estimates. However, major measures of housing costs posted the smallest monthly increases in about a year and grocery prices fell, the report from the Bureau of Labor Statistics showed.

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Investors reacted positively to the report. Treasury yields fell, the S&P 500 opened higher and the dollar extended losses on the day. Traders are still very much betting on a 25 basis point rate hike at the Fed meeting in May.

However, inflation is still very high. Core CPI, which economists consider to be the best indicator of core inflation, rose 5.6% from a year ago. It’s the first time in more than two years that core has outperformed the general gauge, which was up 5%.

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This is a sharp slowdown from the previous month because the number is now being compared to March 2022, when energy prices rose immediately after Russia’s invasion of Ukraine.

Follow the reaction in real time here on the Bloomberg TOPLive blog

The report provides glimpses of subdued inflation ahead even while highlighting the viscous nature of inflation – particularly within the services sector. While policymakers are watching closely for any sign that the recent banking turmoil is weighing on the economy, rapid consumer price gains paired with a still-strong labor market are likely to prompt the Fed to raise rates at least one more time before what they say it will. . be a long pause.

“May still has to tip higher,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “But it takes some wind up as to whether another hike in June is needed at all.”

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Read more: Fed officials split signal about raising rates again

The breakdown showed that shelter costs rose at the slowest pace since November although it remained “by far” the largest contributor to the monthly progress, the report said. Grocery prices fell for the first time since September 2020 — including the biggest monthly drop in egg prices since 1987 — while the cost of eating out continued to rise strongly.

So-called basic commodity prices, which exclude food and energy commodities, rose 0.2%, the most since August. That’s a difference from late last year, when an immediate downturn in this category helped ease overall price pressures.

Used car prices fell in March, while airfare, home furnishings and car insurance rose.

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Energy prices fell 3.5%, to reflect lower prices for gasoline, natural gas and electricity. However, the decline may be short-lived after the OPEC+ announcement of oil production cuts earlier this month. Pump prices are now at their highest since November.

What does Bloomberg Economics say…

A strong disruptive boost to inflation from shelter is expected over the summer. However, given continued strength in the labor market and OPEC+ cuts – as well as pressure from labor-intensive service industries – we expect the FOMC to raise rates by another 25 basis points when it meets next month.

Jonathan Church and Stewart Ball, economists

To read the full note, click here

Shelter costs, the largest component of services and make up about a third of the overall CPI, rose 0.6%. Housing cost measures advanced at the slowest pace in about a year while hotel prices jumped the most since October.

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Because of the way housing metrics are calculated, there is a huge gap between real-time price changes and government statistics. Other metrics suggest these will change soon, but economists are divided on the exact timing.

Excluding housing and energy, prices for services rose 0.4%, according to Bloomberg calculations. The gauge rose 5.8% from a year earlier, the lowest level in seven months.

Fed Chairman Jerome Powell and his colleagues stressed the importance of looking at such a metric when assessing the country’s inflation trajectory, although they calculate it based on a separate indicator. The Fed sees wage growth as one of the primary drivers of inflation in this category and is therefore highly compatible with any changes in a variety of wage measures.

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Minutes of the Fed’s March meeting, due later on Wednesday, will provide more insight into how policymakers balance a series of bank failures with stubborn price pressures.

The latest jobs report showed that the pace of earnings growth has slowed in recent months to a rate more in line with the central bank’s 2% inflation target. However, economists will closely watch the Employment Cost Index, which is seen as a cleaner and more accurate measure of wage growth, later this month.

A separate report released on Wednesday showed that real average hourly earnings rose 0.2% in March, the first increase this year, and fell 0.7% from a year earlier.

The CPI is one of the last major releases the Fed will release before its May 2-3 meeting. In the coming weeks, policymakers will also examine wholesale and retail inflation numbers 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, and Steve Matthews.

(Adds energy prices and market opening)