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United States Inflation March 2019

United States: Inflation picks up in March on higher rent costs and energy rebound

Consumer prices increased 0.4% over the prior month in March, up from February’s 0.2% print and exceeding market expectations of 0.3%. The print was primarily driven by a sharp upswing in energy prices—which had mildly rebounded in February after several months of steep declines—as the rebound in global oil markets since December finally started translating into higher prices at the pump, while disruptions due to floods in the Midwest amplified the increase. On the other hand, core consumer prices—which exclude volatile items such as food and energy—only rose a mild 0.1% in March, matching February’s results. This was due to sharply lower apparel costs weighing on the print, despite robust increases in the prices of shelter and medical services.

Inflation rebounded to 1.9% in March from February’s over two-year low of 1.5%. Meanwhile, core inflation—a closely watched indicator for forecasting future monetary policy moves—edged down to 2.0% in March from 2.1% in February. However, this was likely due in part to methodological changes, as the BLS started incorporating department-store-provided data in the March release. According to economists at Nomura, “in our view, this methodological change amplified the decline in apparel prices during the month. Without apparel prices, core inflation held steady and the underlying inflation trend remained essentially unchanged”.

Turning to the outlook, the rebound in energy prices that began in February should continue in the months ahead, helping push headline inflation higher, but core inflation pressures should remain steady, as reflected by stabilizing wage growth in the March jobs report. This should comfort the Fed in its current data-dependent stance and solidify expectations of stable interest rates throughout this year. As Nomura researchers point out, “given that the Fed [at its March policy meeting] appears to have recently changed their reaction function to inflation and voiced greater concern over disinflation as opposed to higher inflation, we think that incoming information on inflation have raised the hurdle further for resuming rate hikes and likely intensified their concerns over persistent inflation shortfalls”.

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