Headline inflation moderated sharply last month as consumer prices rose at their slowest annual rate in nearly two years. But so-called core inflation proved to be a bit sticky once again, all but ensuring the Federal Reserve will hike interest rates at the next Fed meeting, experts say.
The Consumer Price Index (CPI) for March rose just 0.1% (or 0.05% before rounding), vs February’s gain of 0.4%, the Bureau of Labor Statistics (opens in new tab) said Wednesday. The monthly print was well below expectations for a 0.3% rise in the index.
On a year-over-year basis, March CPI increased 5%, vs forecasts for a 5.2% gain. That represented a steep slowdown from the 6% increase recorded in February, and marked the slowest pace of annual inflation since May 2021.
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However, core CPI, which excludes volatile food and energy prices, offered more of a mixed picture. On a monthly basis, March’s core CPI increase of 0.4% came in lower than expectations for a 0.5% gain. It also compared favorably to February’s increase of 0.5%.
But on an annual basis, core CPI picked up by 5.6%. Although that was essentially in line with expectations, it represented a pick up in core inflation compared to the 5.5% increase logged in February.
Although price increases are clearly moderating, the sluggish rate of deceleration in core inflation indicates that the Fed has more work to do, experts say.
As of April 12, interest rate traders assigned a 74% (opens in new tab) probability to the central bank’s Federal Open Market Committee (FOMC) hiking the short term federal funds rate by another 25 basis points (0.25%) when it next meets in early May.
With the March CPI report now a matter of record, we turned to economists, strategists and other experts to get their thoughts on what the inflation readings mean for markets, macroeconomics and monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.
Expert takes on the CPI report
(Image credit: Getty Images)
“Inflation data reported through the Consumer Price Index was a bit softer than expected on a month-over-month basis and albeit a slow downward move, the overall trajectory will be welcomed by the Fed. Most of the softness in the report was driven by declining used car prices and a slower acceleration in shelter. Working against the numbers was the increase in airfares of 4%, which is not that surprising given all the spring traveling. On balance, the latest CPI data does not provide much runway for the Fed to continue lifting policy rates after the May meeting and it is becoming more likely that we are nearing the peak in Fed policy rates.” – Charlie Ripley, senior investment strategist at Allianz Investment Management (opens in new tab)
“This was a relatively good report on inflation, as the top line number came in below market expectations, while the year-over-year number was the lowest since May of 2021. However, the monthly core CPI remained strong, up 0.4% while the year-over-year rate increased from 5.5% in February to 5.6% in March. This will keep the Federal Reserve (Fed) in hawkish mode as the May interest rate decision approaches, at which time we believe the Fed will increase the federal funds rate for the last time in this cycle, by 25 basis points.” – Eugenio Alemán, chief economist at Raymond James (opens in new tab)
“The March CPI report was mixed, with a decline in headline inflation but a tick up in core prices. Central bankers are likely drawing a collective sigh of relief as they see evidence of their policy decisions taking effect, including a notable slowing of rental inflation. The underlying drivers of inflation are tracking with our expectations of a downward trajectory, but that trajectory hinges upon the Fed recognizing that there’s still more work to do.” – Andrew Patterson, senior international economist at Vanguard (opens in new tab)
“The Federal Reserve will not pause until they see a meaningful slowing in both headline and core CPI. I anticipate two more rate hikes until any sort of pause from the Fed. The market is currently not pricing in the second rate hike, but I think the odds are high that we see it. The Fed can’t risk pausing early only to see inflation tick back up in the back half of this year. They already have a credibility crisis and they can’t afford anymore unforced errors.” – David Nicholas, portfolio manager at XFUNDS (opens in new tab) and CEO of Nicholas Wealth Management
“Inflation in the U.S. appears to be on a faster path down from its dizzying heights, prompting relief on financial markets that the punishing cycle of rate hikes may soon be at an end. But caution is still likely to creep in as it’s still not going to be a super-easy descent. Heat is not cooling off from all areas of the economy, with rents and used car prices hot spots last month, so it still seems highly likely there will be one more rate hike of 0.25% from the Fed next month. Nevertheless, the relief is palpable that inflation continues to head in the right direction, and expectations will rise that policymakers will put their fingers on the pause button in June.” – Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown (opens in new tab)
“Excluding shelter costs, consumer prices rose 3.4% from a year ago, fueling bets that the Fed is close to ending its rate hiking campaign. As the economy slows, consumer prices will decelerate further and should bring inflation closer to the Fed’s long-run target of 2%. Although inflation is easing this year, it may take significant time for inflation to reach 2%. Markets will likely react favorably to this report as investors gain more confidence that the next Fed meeting may be the last meeting when the committee raises the fed funds target rate.” – Jeffrey Roach, chief economist at LPL Financial (opens in new tab)
“March CPI: Non-event. Core CPI met expectations. While this is being received as a relief by markets, this input is not enough to nudge the FOMC from its current path. This reading is consistent with a 4% to 5% trend in core inflation. Recently, FOMC participants (Williams and Goolsbee) have cautioned that the banking disruptions are likely to restrain growth equivalent to approximately 50 basis points of fed funds hikes. Coupled with a May hike of 0.25%, that should roughly equal the pre-SIVB tightening. Our view is that the Fed will be on hold after May to assess the combined effects of the credit disruptions, the cumulative funds hikes and balance sheet reductions. By tomorrow, the market narrative will have forgotten about this release and moved to focus on upcoming Q1 earnings.” – Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co. (opens in new tab)
“The Fed will take some comfort from calmer headline inflation, especially given that declining energy costs and now flat food prices will help to reduce inflation expectations. But services inflation remains stubbornly high, largely due to the tight labor market. Another 25 basis point rate hike seems likely on May 3.” – Sal Guatieri, senior economist at BMO Capital Markets (opens in new tab)
“March CPI: Glass Half Something. For the inflation optimists out there, the March CPI report delivered good news with total prices rising by the smallest amount in nine months and hints that core services inflation is starting to moderate. However, for the inflation pessimists, the latest CPI report shows the recent underlying trend in price growth remains far too high. Core consumer prices continue to grow much faster than the Federal Reserve’s target, but we believe slower inflation is coming in the months ahead as the economy cools and finds better balance in a post-pandemic world. We do not think today’s report materially changes the outlook for U.S. monetary policy. We still expect a 25 basis point rate hike from the FOMC at the conclusion of its next meeting on May 3.” – Sarah House, senior economist at Wells Fargo Economics (opens in new tab)
“Like the payroll report, a nice headline masking disappointing details. The markets sure liked the CPI number that came out for March, but I have to admit that I was less than impressed. Perhaps there is a sigh of relief since the headline came in light against the consensus. The problem is that the core services (ex-energy) came in at +0.4% and core goods (ex-food and energy) was +0.2%, the hottest reading since August 2022. Some progress, but for this group of monetary policymakers, likely not enough based on what they have been signaling.” – David Rosenberg, founder and president of Rosenberg Research
“If you think the Fed should keep hiking until core CPI hits 0.2% month-over-month then you’re ignoring everything that was ever learned about policy lags and you’re going to be very surprised about the state of the economy over the next few months. Just don’t dare say no one saw it coming.” – Ian Shepherdson, founder and chief economist of Pantheon Macroeconomics (opens in new tab)
“The 0.1% rise in consumer prices in March and 5% increase on a year-over-year basis were both below economists’ expectations and signal continued progress in the Federal Reserve’s battle to combat inflationary pressure throughout the economy. The better-than-expected result was partially driven by a fall in energy prices during the month, as core consumer inflation came in line with expectations. All in all, this was a relatively positive update as it showed a continued slowdown in inflationary pressure, however there is still real work to be done to get inflation back to the Fed’s target range of 2%.” – Sam Millette, fixed income strategist at Commonwealth Financial Network (opens in new tab)
“Total inflation is slowing as last year’s surges in gasoline and food prices start to fall out of the year-over-year comparison, but core inflation is still too high. With major equity indexes holding up, consumer confidence higher in March, solid payrolls growth and a low unemployment rate, the Fed will probably raise the federal funds target another quarter percentage point at their next decision in the first week of May. That hike is not a sure thing, and influential voices at the Fed like Chicago President Goolsbee are laying out the justification for a pause. But it is more likely than not. That will probably be the last hike of the cycle, as anticipated in the Fed’s March dot plot.” – Bill Adams, chief economist at Comerica Bank (opens in new tab)