The Mid-term Growth of Core Consumer Price Index (CPI) in the First Three Months of the Fed’s Inflationary Cycle

The Bureau of Labor Statistics reported Wednesday that prices increased by 5% for the 12 months ended in March. Annual CPI plunged to its lowest rate since May 2021, helped by year-over-year comparisons to a period when food and energy prices spiked amid Russia’s invasion of Ukraine.

Stripping out the often-volatile components of food and energy, core CPI grew 0.4% for the month, resulting in a 5.6% annual growth rate. In February, core CPI accelerated 0.5% month on month and 5.5% year over year.

Shelter costs, which tend to reflect lagging data, were the biggest contributor of the monthly gain.

It’s a good print, but it’s not the end of the game, says the principal economist at the Conference Board. We are headed in the right direction, hopefully, and there will be more to come.

He said that core inflation is remaining more persistent. “I expect improvement really toward the middle and second half of the year when the cost of housing services really begins to slow.”

CPI is one of the major inflation gauges that’s being watched like a hawk by the Federal Reserve, which is in the throes of a yearlong campaign to battle inflation through monetary tightening and stark interest rate hikes.

Mark Zandi told CNN inflation started to take off last spring and through June. “And so things are going to feel a lot better here in the next few months because of those base effects.”

Because month-to-month changes can be volatile, even in spite of seasonal adjustments, year-over-year comparisons typically can help smooth out some of that jumpiness.

But times have been anything but typical for the past three years. For the months ahead, moving averages become all the more important.

The picture is more clear for headline and core, but it is a little more opaque for core activity.

Gary Pzegeo, head of fixed income at CIBC Private Wealth US, said in a statement that the Fed would be looking at some relief incore as a sign of slower wage gains. The report shows that the supercore decelerated in March, but still runs around 4% annually on a three- and six-month basis.

The Fed is expected to raise interest rates by a quarter percentage point in the next policy meeting, as the latest inflation reading shows.

The Fed’s fight grew more complex in March with the collapse of two regional US banks, which then caused turmoil in the financial industry. The Federal Deposit Insurance Corporation, along with the Treasury Department and the Fed, stepped in to prevent future bank runs.

The turmoil is expected to cause future credit tightening, which in turn could help the Fed in its inflation-fighting goals. It could create uncertainty about the future of the economy.

“The CPI is backwards looking and the Fed still has to consider how much of a credit crunch to factor into the economy,” said Gina Bolvin, president of Bolvin Wealth Management, in a statement.

The pace of inflation has waned since reaching a decades-high level last summer, but it has been slower than expected as the economy has continued to benefit from a strong labor market.

Service Prices Rise And Fall: The Fed’s Job Was To Show More Paranoid Than Anyone Other Than You and Is Your Job “Major”

Prices rose 0.1% between February and March. The rising cost of shelter accounts for much of that increase. Food prices were stable while energy prices fell.

“The Fed’s job is to be more paranoid than anyone else. “We are paid what they pay us for.” said Austan Goolsbee, president of the Chicago Federal Reserve Bank. It means we have to dig into loads of new information when there are wild shocks and financial stresses.

The most worrisome price hikes of the day, according to Goolsbee, are in the services sector, which was hit hardest by the Pandemic and has not adjusted to a rapid rebound in demand.

“The economy is still coming back from bizarro COVID times,” Goolsbee said. “Inflation has come down for goods,” he said. “But now services inflation, especially in the categories where spending is discretionary and was repressed for a few years — like travel, hotels, restaurants, leisure, recreation, entertainment — demand has returned and the inflation has proved particularly persistent.”

The service industry is not as sensitive to rising interest rates as the manufacturing industry is.

One encouraging sign for the Fed is that wages — an important factor in service prices — have cooled in recent months. The average wages increased in March by 4.2% compared to the increase in February.