US consumer prices slide
US consumer prices fell for the first time in 10 months in March, weighed down by a fall in the cost of petrol, but underlying inflation continued to firm amid rising prices for healthcare and rental accommodation.
The drop in the headline monthly inflation reported by the Labour Department on Wednesday is likely temporary, with producer prices increasing solidly in March.
In addition, the tightening labour market is expected to start generating significant wage inflation in the second half of the year. As such, many economists believe the Federal Reserve will raise interest rates three more times in 2018.
The US central bank increased borrowing costs in March and forecast at least two additional rate hikes in 2018. “US inflation is warming up rather than heating up,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Still, the upward trend could suffice to nudge the Fed three more times this year.”
The Consumer Price Index (CPI) slipped 0.1% in March, the first and largest drop since May 2017, after climbing 0.2% in February, the Labour Department said.
In the 12 months through March, the CPI increased 2.4%. That was the largest annual gain in a year and followed February’s 2.2% increase. Annual inflation is rising as the weak readings from 2017 drop from the calculation.
Excluding the volatile food and energy components, the CPI climbed 0.2%, matching February’s increase. The core CPI rose 2.1% year on year in March, the largest advance since February 2017, after increasing 1.8% in February. The core CPI is now well above the 1.8% annual average increase over the past 10 years.
Economists had forecast the CPI unchanged in March and the core CPI rising 0.2%. The Fed tracks a different index, the personal consumption expenditures (PCE) index excluding food and energy, which consistently ran below the central bank’s 2% target since mid-2012.
The dollar was trading lower against a basket of currencies while prices for US Treasuries were up. US stock index futures were weak. Inflation is also expected to get a boost from a $1.5-trillion income tax cut package and increased state spending, plus a weakening dollar. Economists expect the core PCE price index will breach its target in 2018.