Inflation rose 5% in March as Fed mulls next policy move

Inflation eased to its lowest level in nearly two years last month, although prices remain punishing for many US households as the Federal Reserve weighs whether it will need to continue hiking interest rates.

The March reading of the Consumer Price Index – a closely-watched measure of inflation that tracks changes in the costs of everyday goods and services – rose 5% in March compared to the same month one year ago. The annual increase was the smallest since May 2021.

On a monthly basis, prices increased by 0.1% compared the February, according to the Bureau of Labor Statistics report on Wednesday.

Core inflation, which excludes volatile food and energy prices, jumped 5.6% year-over-year in March and by 0.4% compared to February.

US stocks rallied on the March CPI report. The Dow was up 167 points, or 0.5%, in early trading at 33,851.87, while the Nasdaq rose 0.7% and the S&P 500 was up 0.6%.

While the report showed inflation cooled slightly more than expected, it is still running well above the Fed’s 2% target and putting continued financial pressure on American households.

Core prices are a source of particular concern for policymakers, according to Christopher Rupkey, chief economist at FWDBONDS in New York.

“Inflation isn’t under control yet which means the Federal Reserve has more work to do,” Rupkey said. “The jury is out on whether it will take a full-blown recession to bring inflation back to target just like in every other inflation outbreak in economic history looking back to the 70s.”

Ahead of the announcement, economists polled by Dow Jones expected headline inflation to increase by 5.1% and core inflation to increase by 5.6%. Prices were expected to rise by 0.2% compared to February.

Despite some improvement, food prices are still hammering American families. The food index jumped by 8.5% year-over-year in March. The CPI’s “food away from home” category, which represents grocery prices, surged by 8.8%.

The price of eggs – a source of major sticker shock in grocery aisles over the last year – decreased by 10.9% from February to March but was still 36% higher than it was one year ago.

An 8.2% increase in shelter costs was “by far the largest contributor to the monthly all items increase,” according to the BLS’s release. Still, a 0.6% monthly increase was the smallest jump since November.

Energy costs sank by 6.4% year-over-year and by 3.5% compared to March. The services index, which includes the cost of shelter as well as transportation and medical care, increased by 7.1%.

The March CPI report was considered a key bellwether for the Federal Reserve’s campaign to tame prices through a series of rate hikes.

Uncertainty about the Fed’s policy path has increased since the failures of Silicon Valley Bank and Signature Bank of New York last month reignited fears of a global economic crisis.

Fed Chair Jerome Powell has suggested that the bank turmoil will have a cooling effect on the economy similar to that of an interest rate hike – a development that could help bring down inflation and lead policymakers to adopt a more dovish approach to policy.

Critics of the Fed’s approach have warned that the central bank risks tipping the US economy into a recession by hiking rates too aggressively.

Those fears were exacerbated by an increased likelihood of a credit crunch given the recent chaos in the global banking sector.

Minneapolis Federal Reserve Bank President Neel Kashkari, a voting member of the rate-making Federal Open Market Committee, signaled this week that the Fed needed to prioritize its fight against inflation despite the recession risk.

“We need to get inflation down,” Kashkari said at an event at Montana State University, according to Reuters.

“If we were to fail to do that, then your job prospects would be really hard,” he added.

The latest inflation data surfaced days after the Labor Department’s March jobs report showed the US labor market remains historically tight – with unemployment running at just 3.5%.

The Fed and most economists view a hot jobs market as an inflation driver since it drives up labor costs for employers.

Ahead of the March CPI report, Goldman Sachs partner and veteran trader John Flood warned that a hotter-than-expected inflation number would fuel more uncertainty and trigger a stock selloff.

“Stock market wants a softer print as a hot reading will add more confusion/uncertainty into the equation of what the Fed does from here,” Flood said in a note to clients, according to Bloomberg. “Another hike in May but then aggressive cuts in Q4? This is what Fed fund futures are pricing in ahead of tomorrow’s print.” 

As of Tuesday night, the market was pricing in a 67.8% probability that the Fed would implement a quarter percentage point hike to benchmark interest when its next meeting concludes on May 3.

Investors saw just a 32.2% chance that the Fed will stand pat and keep rates unchanged, according to CME Group’s FedWatch tool.

The probabilities remained roughly the same after the CPI report’s release.