Inflation cooled in March as Federal Reserve rate hikes had more impact, the Labor Department reported on Wednesday.
The Consumer Price Index, a widely used measure of the cost of goods and services in the US economy, rose 0.1% for the month versus a Dow Jones estimate of 0.2% and 5% from a 5.1 estimate % a year ago.
Ex-Food and Energy, core CPI rose 0.4% and 5.6% on a yearly basis, both in line with expectations.
The data showed that while inflation is still well above where the Fed is comfortable, it is at least showing sustained signs of slowing. Policymakers are targeting inflation around 2% as a healthy and sustainable level of growth. The overall annual CPI increase was the smallest since June 2021.
A 3.5% drop in energy costs and a flat food index helped keep headline inflation under control. Groceries at home fell 0.3%, the first drop since September 2020, although they are still up 8.4% yoy. Egg prices, which had been skyrocketing, fell 10.9% this month, up 36% over 12 months.
A 0.6% increase in housing costs was the smallest increase since November but still pushed prices up 8.2% on an annualized basis. Shelter accounts for about a third of the weight in the CPI and is closely watched by Fed officials.
Stock market futures rose sharply while government bond yields fell after the report. Markets are still pricing in a 65% chance of a final 0.25 percentage point rate hike at the Fed’s May meeting, although that was slightly lower than Tuesday, according to CME Group.
According to Jeffrey Roach, US chief economist at LPL Financial, the consumer price index (CPI) excluding housing rose 3.4% year-on-year.
“As the economy slows, consumer prices will continue to fall, bringing inflation closer to the Fed’s long-term target of 2%,” Roach said. “Markets are likely to react positively to this report as investors gain more confidence that the next Fed meeting could be the last meeting at which the committee hikes the Fed’s interest rate.”
Used car prices, which were a key contributor to the initial surge in inflation in 2021, fell another 0.9% in March and are now down 11.2% year-on-year. Medical costs also fell by 0.5% over the month.
Over the past year, the Fed has hiked interest rates nine times by a total of 4.75 percentage points, the fastest rate of tightening since the early 1980s. Officials initially dismissed inflation as temporary and expected it to fall as factors surrounding the Covid pandemic dissipated, but were forced to catch up as price hikes proved more permanent.
A key area the central bank has targeted is the labor market. A labor shortage had helped push up wages and prices, a situation that has eased somewhat in recent months.
In March, nonfarm payrolls rose by 236,000, the smallest increase since December 2020, and average hourly wages rose 4.2% annually, the lowest level since June 2021.
The Fed hopes it can calibrate policy so that the slowdown it’s trying to induce in the jobs market doesn’t plunge the economy into a recession. According to data from the Atlanta Fed, gross domestic product growth for the first quarter is at an annualized pace of 2.2%, although many economists expect a contraction later in the year.