The increase in the headline CPI was lower than the expected reading for March of 0.2%; this follows a reading of 0.2% in February. The core rate was also 0.1% higher, less than the 0.2% expected reading and following two consecutive 0.3% monthly increases. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 0.9% and 2.2% higher, respectively.
The CPI’s energy price index rose in March by 0.9% (the largest monthly change since May 2015), following a 6.0% dip in February. If we exclude the effects of energy, the CPI would still have been unchanged in March and was 2.0% higher than a year ago. The CPI excluding food prices would have risen by 0.1% and was 0.9% higher year-over-year. Food and energy combined account for slightly less than 25% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (33% of the CPI), medical care, recreation, and tobacco were the key positive contributors. While any drag largely came from airline fares, used cars and trucks, communication, and household furnishing and operations.
It is also worth noting that the “services less energy services” component of the CPI accounts for 59.7% of the entire index and is now growing by 2.4% annually. This has been an important anchor helping offset any commodity-related decreases in prices.
March’s increase in the CPI was again largely being driven by the main components of shelter and medical care. However, the reality is that inflation does seem to be firming and the sharp pickup in energy prices from around $26 per barrel in February to almost $40 per barrel in the survey period for March has been a significant factor. This recovery may tentatively be starting to get the market slightly more concerned about inflation judging by the small recovery in TIPS yield spreads, as the headline CPI continues to moves back up towards where the core readings are (i.e., above 2%). Once again it is worth noting that the Fed targets the PCE (personal consumption expenditure) price index, where there has recently been a marked divergence from the CPI. This has largely been due to the different relative weighting of both shelter and healthcare. While today’s report will not cause the Fed to change its outlook, it will further help it to be a little more comfortable with its inflation forecasts, particularly given the widespread deflation scare that was apparent in January and February in the financial markets.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.