United States: Headline, core inflation accelerate in March on base effects
April 11, 2018
Consumer prices declined 0.1% from the previous month in March, contrasting the 0.2% month-on-month increase recorded in February and disappointing market analysts, who had expected consumer prices to remain unchanged in March. The print reflected a sharp 4.9% decline in prices at the pump, which followed a 0.9% month-on-month decrease in February. March’s large decline in energy prices outstripped a meager 0.1% increase in food prices and firmer core prices. However, despite the sequential decline in prices, inflation rose to a one-year high of 2.4% in March from 2.2% in February on the back of a base effect on some core prices.
Core consumer prices, which exclude volatile items including food and energy prices, rose 0.2% from the previous month in March, mirroring the increase recorded in February and matching market expectations. Shelter prices rose 0.4% in March (February: +0.2% month-on-month) as both rent and hotel prices posted robust gains. Healthy increases were also reported in medical care, personal care and motor vehicle insurance. Conversely, prices for apparel, communication and used cars all recorded month-on-month declines in March.
Meanwhile, core inflation accelerated to a one-year high of 2.1% in March from 1.9% in February as a marked decline in cell phone contract prices recorded in March of last year dropped out of the 12-month calculation. A similar jump is expected in March’s core PCE inflation reading, the Federal Reserve’s preferred measure of inflation.
A pick-up in core inflation spells good news for the Federal Reserve, pointing to a gradual build-up in price pressures and thus vindicating the Bank’s tightening bias. Inflation is expected to accelerate further as tax cuts and increased government spending caps fuel stronger economic growth, warranting a less accommodative monetary stance. That said, recent episodes of financial volatility and threats of protectionist policies pose sizeable risks to the economic outlook, which could force the Fed to recalibrate the pace of rate hikes.
Author: David Ampudia, Economist