Consumer prices jumped up 0.4% on a month-on-month basis in March, driven higher by a 3.5% increase in energy prices. March’s headline increase was in line with market expectations. The jump lifted headline inflation to 1.9% on a year-on-year basis in March, up from 1.5% in February.
It was another soft month for core price pressures. CPI excluding food and energy was up a slight 0.1% in March, matching February’s modest gain. Core inflation is now up 2.0% on a year-on-year basis, a continued deceleration from readings of 2.3-2.4% in the middle of 2018.
Core inflation was held back by a 1.9% drop in apparel prices in March – the biggest one-month drop in 70 years. Prices also fell for used cars and trucks (-0.4% m/m), airline fares (-0.6%), communication (-0.2%), and motor vehicle insurance. Prices for shelter continued to rise (+0.4%), as did medical care (+0.3%), new vehicles (+0.4%), recreation(+0.3%) and education(+0.5%). Many of these hotter categories are services, and core services inflation did accelerate, up 0.3% in March, after a string of 0.2% readings. Core services inflation was steady at 2.7% on a year-on-year basis in March.
In contrast to the acceleration in services inflation, core goods inflation was non-existent in March, flat on a year-on-year basis.
Food inflation continued to strengthen in March. Food prices rose 0.2% on the month, and are up 2.1% versus a year ago. That may not sound too impressive, but food prices were in deflationary territory two years ago, and 2.1% is the fastest pace in four years.
Key Implications
There was a little something for everyone in this report. Another soft reading for core inflation signals a lack of inflationary pressures in the U.S. economy so far in 2019. On the other hand, a pick-up in core services inflation in March puts a halt to the worrying deceleration in price pressures on the services side. And, the likely temporary nature of the drop in apparel prices mutes the impact of the soft core reading somewhat.
Overall, the March CPI data is another month of goldilocks inflation. Not too hot that the Fed needs to reevaluate its pause, and not so cold that it needs to consider easing policy. CPI is not the Fed’s preferred metric. However, because of the government shutdown-related data delays, it is two months ahead of PCE inflation at the moment, and therefore a more timely indicator. With inflation just right, the FOMC can go upstairs and take a nice nap for quite some time.
