Consumer Prices Jump 8.5%

This morning, the CPI rose 1.2% in March, as expected according to?Bloomberg?and the sharpest monthly increase since September 2005. Year-over-year, consumer prices jumped 8.5%, up from the 7.9% pace reported the month prior and the fastest rate since December 1981.

Food prices rose 1.0% and energy prices surged 11.0% in March, up from a 3.5% gain in February. Excluding food and energy costs, the core CPI rose 0.3%, less than the 0.5% gain expected according to?Bloomberg, and following a 0.5% increase in February. Year-over-year, the core CPI increased 6.5%, the largest annual increase since August 1982.

In the details, commodities prices jumped 2.1%, medical care prices increased 0.5%, and apparel prices climbed 0.6% in March. Also, housing prices increased 0.7%, thanks to a 0.4% rise in the OER, other goods and services costs rose 0.5%, and recreation prices gained 0.2% at the end of Q1. Additionally, transportation prices climbed 3.9%, due to a 0.2% gain in new vehicle prices. Used cars and truck prices, however, dropped 3.8% in March, the second consecutive month of decline. Additionally, education and communication fell 0.2% in March following no change in February.

Bottom Line:?As the White House warned before this morning’s report was released, inflation is?"extraordinarily elevated."?At 8.5%, this is the highest level of inflation since the early 1980s.?

For market participants, the continued rise in costs was as anticipated with supply disruptions lingering in the aftermath of the Covid-19 pandemic, and more recent price pressures resulting from the Russian invasion of Ukraine and other related events. Of course, while a headline rise of 8.5% may have been somewhat expected and arguably priced into the market, the continued backup in costs also leads to heightened expectations for the pathway of monetary policy.

According to Federal Reserve Chairman Jerome Powell, the Committee is prepared to take even more aggressive action such as raising rates in 50bp steps, as well as initiating a drawdown of the balance sheet, if warranted, even at the risk of undermining the recovery. Speaking to the National Association of Business Economics (NABE) Policy Conference attendees on March 21, Powell said,?“If we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well…No one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context.”?Monetary policy after all, he said,?“is a blunt instrument, incapable of surgical precision.”?Furthermore, according to the latest March FOMC meeting minutes, the majority of the Committee supports a near-term draw down of the Fed’s portfolio at $95 billion a month ($35 billion in MBS/$60 billion in UST).

At this point, it is hard to imagine more justification is needed for further Fed action beyond a four-decade high in inflation. As such, the market is widely anticipating a half of a percentage point increase; according to?Bloomberg, a 50bps increase come May 4 is priced in at a 95% probability.

According to the Fed’s expectations, after a second-round hike next month, the Committee will continue to raise rates aggressively for the remainder of the year, likely reaching near 2% – maybe higher – by December. The Committee’s growth forecasts, meanwhile, remain robust at near 3% GDP for 2022 and 2.2% for 2023. However,?with the economy moderate at best, and arguably already poised to lose momentum heading into the second half of the year, the likelihood of achieving 3% growth coupled with an expected 150bps or more of tightening by December on top of a probable $760 billion in QT through year-end is extremely limited. More likely, the Fed’s more aggressive pathway will lead to extremely limited domestic activity, potentially choking off growth altogether and resulting in negative GDP, or worse, recessionary conditions. Despite the rising risk of a weaker economy, from the Fed’s perspective, even facing such a potentially negative outcome, many Committee members argue it is a necessary evil or worthwhile outcome to rein in inflation.

This morning, equities are trading higher with the Dow up 0.60% at 34,423 as of 9:19 a.m. ET.

Yields, however, are trading lower with the 2-year down 7bps at 2.43%, the 10-year down 6bps at 2.72%, and the 30-year down 3bps at 2.78% as of 9:20 a.m. ET.

Yesterday, the economic calendar was empty.

Additionally this morning, the NFIB Small Business Optimism Index declined from 95.7 to 93.2 on March, more than the fall to 95.0 expected and the lowest reading since April 2020.

Tomorrow, the PPI is expected to rise 1.1% in March following a 0.8% gain in February and is expected to rise 10.6% over the past 12 months. The core PPI is expected to increase 0.5% and 8.4% year-over-year following a similar annual increase in February.

Later this week, on Thursday, retail sales are expected to rise 0.6% in March, up from the 0.3% gain in February, and jobless claims are expected to rise from 166k to 170k in the week ending April 9. Additionally, import prices are expected to rise 2.3% in March following a 1.4% gain the month prior, and business inventories are expected to climb 1.3% in February, up from the 1.1% gain at the start of the year.

Finally, on Friday, the Empire Manufacturing Index is expected to rise from -11.8 to +1.0 in April. Additionally, industrial production is expected to rise 0.4% in March and capacity utilization is expected to rise from 77.6% to 77.8%.

-Lindsey Piegza, Ph.D., Chief Economist