Headline CPI Cools, Core Remains Sticky Complicating Inflation and Policy Outlook

This morning, the CPI rose 0.1% in March, slightly less than the 0.2% increase expected and following a 0.4% gain in February. Year-over-year, consumer prices rose 5.0%, down from the 6.0% pace reported the month prior and the ninth consecutive month of cooling price pressures.

?

Food prices were flat (0.0%), while energy prices dropped 3.5% in March, following a 0.6% decline in February. Excluding food and energy costs, the core CPI rose 0.4%, as expected and following a 0.5% increase in the second month of the year. Year-over-year, the core CPI increased 5.6%, up, however, from the 5.5% gain the month prior.

?

In the details of the report, airline fares jumped 4.0%, shelter prices increased 0.6%, thanks to a 0.5% rise in the OER, and other goods and services costs increased 0.5%. Also, apparel prices increased 0.3%, education and communication prices increased 0.2%, and recreation prices rose 0.1%. On the other hand, commodities prices declined 0.3%, and medical care prices also fell 0.3%, the third consecutive month of decline. Additionally, transportation prices declined 0.5%, due to a 0.9% drop in used cars and trucks prices. New vehicle prices, however, rose 0.4%.

?

Bottom Line:?This morning’s inflation read is one of the two last price reports before the Fed’s May FOMC meeting. As such, with the Fed hyper-focused on reinstating price stability, market players have been holding their breath waiting for the latest CPI data as an indication of whether or not the Fed can continue to raise rates in the wake of banking sector unease. Of course, one data point does not make a trend, but this morning’s cooler-than-expected monthly?rise will reinforce the argument?the Fed can take a pause, while the Committee assesses?the full impact of earlier?policy metrics on the broader?economy and price pressures.?

That being said, while the Fed?certainly?could?choose to pause in May, the question remains?will?the Committee move to the?sideline? After all, while the headline print marks the slowest annual increase since May 2021, it is still more than double the Fed's 2% inflation target. Furthermore, the declining?momentum of disinflation or lack of downside progress,?particularly?in the core, is not yet convincing?inflation will continue to abate.?

?

The Fed was late to the inflation-taming party, holding onto?"transitory"?for longer than was appropriate. Thus, with a policy error on the front end, there is increased pressure on the Fed to avoid a second policy mistake on the back end by stopping short of slaying the inflation dragon. In other words, the Fed may opt to err on the side of caution?continuing to raise rates in May and beyond until the data clearly indicate a return of price stability is an absolute,?particularly given the still solid nature of the economy and the consumer?potentially offering a limited opportunity for further action. That doesn’t mean the Fed needs to see inflation reach 2% before backing off, but the downward trajectory of inflation will need to be more firmly?established before the Committee can hang the mission accomplished banner and retreat – and relax comfortably – on the sidelines.?

Earlier this week, we noted the?global economy might be heading for an extended period of lackluster growth amid tighter monetary policy initiatives and less supportive fiscal policy. According to International Monetary Fund Managing Director?Kristalina?Georgieva, global economic growth will likely fall below 3% this year and remain near that level for the next five years, marking the lowest medium-term global growth forecast since 1990.?

?

“With rising geopolitical tensions, with inflation still running high, a robust recovery remains elusive…That harms the prospects of everyone, especially for the most vulnerable people and most vulnerable countries,”?Georgieva said.

?

Treasury Secretary Janet Yellen, meanwhile, downplayed the potential risks of the recent market turmoil, reiterating the official?tagline of a solid and resilient banking sector.?Speaking at a news conference on Tuesday,?Yellen said,?"I?wouldn't overdo the negativism about the global economy. The U.S. banking system remains sound.” “I'm not anticipating a downturn in the economy, although that remains a risk," she added.

?

Also yesterday,?the NFIB Small Business Optimism Index declined from 90.9 to 90.1 in March, less than the expected decline to 89.8, albeit a three-month low.?

?

Later today, at 2:00 p.m. ET, the meeting minutes from the March FOMC meeting will be released. While the Fed opted to raise rates an additional 25bps last month, investors will want to know how widely a pause was discussed. Was a move to the sidelines seriously considered yes or no – and why or why not? Is the Fed increasingly convinced they have done enough to tame inflation and policy is nearing a sufficiently restrictive level, or did the recent turmoil in the market spook members to discuss a pause? On the other hand, if policy makers did not widely contemplate a move away from further tightening, was the lack of consideration the result of inflation fears, a strong assessment of the labor market, or perhaps international concerns?

?

According to Fed Chairman Jerome Powell during the press conference, the Committee did consider a pause leading up to the meeting but based on a strong labor market and elevated inflation, well, he said,?“you see the decision we made.”

?

We will be combing over the text to see the directional momentum of the conversation to parse any clues or indications of tendency as we rapidly approach the May FOMC rate decision, now just 20 days away.?

?

Tomorrow, on the?heels of today’s CPI report, the last inflation report before the Fed’s May policy decision will be released. Last month, the headline PPI rose 4.6% in February with the core up 4.4%. In March,?the headline PPI s expected to rise 3.0% and 3.4% excluding food and energy.

?

And, rounding out the week amid the release of industrial production, capacity utilization, export prices, business inventories and consumer sentiment is the retail sales report release on Friday.

?

The consumer proved surprisingly resilient at the start of the year fueled by a last drawdown in savings, an increased willingness to ramp up credit card debt, a final sputtering of state and local stimulus, not to mention some unseasonably favorable weather in parts of the country. All of these factors, while welcome for many individuals and households, proved temporary in nature as opposed to lasting drivers of strong, positive activity with a disappointing drop in February, the largest monthly decline since December 2022.?

?

?-Lindsey Piegza, Ph.D., Chief Economist?