Ugly overall, but some good news inside.
The March CPI jumped by 0.9 percent (equal to market expectations), bringing the 12-month trend rate up to 3.3 percent – the fastest pace since September 2023. This was largely an energy event, with energy prices up by 10.9 percent for the month (gasoline spurting by 21.3 percent and fuel oil by 30.7 percent). Fortunately, food prices were unchanged for the month, suggesting that there was not much linkage of higher energy prices into food costs (from, for example, rising fertilizer costs). The core CPI (removing the volatile food and energy components) rose by 0.2 percent, a bit less than market expectations. Even with modestly less core inflation than expected for the month, the trend rate rose from 2.5 percent (actually 2.47 percent, so almost 2.4) to 2.6 percent.
The good news in the report is that it is difficult to see much, if any, spillover from the jump in energy costs into other prices – at least not yet. The longer energy prices remain elevated, however, the more likely it is that other prices will be boosted – pushing the core CPI (and the core PCE price index which the Fed follows more closely) higher. Yesterday’s release of the February PCE inflation data showed that this broader measure of inflation remained stuck at around 3.0 percent. The Fed will almost certainly stay on the sidelines until the full impact of the surge in energy prices – and their spillover into broader inflation – is clearer. The longer energy price gains are outsized, the more likely it is that they will leak into other parts of the economy, pushing core inflation higher. How high and for how long would it take for the Fed to tighten monetary policy? Too soon to tell. And what happens if the reduction in consumer purchasing power from higher energy prices slows economic growth – a negative supply shock that could push the economy into recession (although that is still not the most likely course at this time)? Would the Fed fight the higher inflation at the cost of slowing economic growth still more, or would it fight slower growth by easing policy at the cost of keeping inflation higher for longer? There are no easy answers in that scenario.
While this CPI report is for March, gasoline price data for April suggest that next month’s CPI will also show a jump. The real question will be whether core inflation also starts to move higher as a result of the energy price shock.
David W. Berson, Ph.D., CBE
Chief Economist
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