US consumer prices drop, but core inflation firming
WASHINGTON: US consumer prices fell for the first time in 10 months in March, weighed down by a decline in the cost of gasoline, but underlying inflation continued to firm amid rising prices for healthcare and rental accommodation.
The drop in the headline monthly inflation reading reported by the Labor Department on Wednesday is likely temporary as producer prices increased 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 this year.
The US central bank increased borrowing costs last month 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 slipped 0.1 per cent last month, the first and largest drop since May 2017, after climbing 0.2 per cent in February, the Labor Department said.
In the 12 months through March, the CPI increased 2.4 per cent. That was the largest annual gain in a year and followed February’s 2.2 per cent increase. Annual inflation is rising as the big price declines from last year drop from the calculation.
Excluding the volatile food and energy components, the CPI climbed 0.2 per cent, matching February’s increase.
The so-called core CPI rose 2.1 per cent year-on-year in March, the largest advance since February 2017, after increasing 1.8 per cent in February. The annual core CPI also accelerated as the drag from last year’s plunge in prices for cellphone service plans dropped out of the calculation.
The core CPI is now well above the 1.8 per cent annual average increase over the past 10 years. Economists polled by Reuters had forecast the CPI unchanged in March and the core CPI rising 0.2 per cent from the prior month.
The Fed tracks a different index, the personal consumption expenditures price index (PCE) excluding food and energy, which has consistently run below the central bank’s 2 per cent target since mid-2012.
Last year’s low prices for cellphone service plans are also expected to fall out of the calculation for March PCE price index data, which is scheduled for release on April 30.
This factor is was also highlighted in minutes of the Fed’s March 2021 policy meeting published on Wednesday.
According to the minutes, “several participants noted that the 12-month PCE price inflation rate would likely shift upward when the March data are released because the effects of the outsized decline in the prices of cell phone service plans in March of last year will drop out of that calculation.”