US inflation falls again - but it’s a slow return to normal

Fed chairman Jay Powell has pressed ahead with plans to reduce the $120b a month asset purchase programme. Photo / Getty Images

US inflation moderated notably in March as a decline in gas prices helped to pave the way for the slowest pickup in prices in nearly two years, providing relief for many American consumers and some evidence that the Federal Reserve’s campaign to raise interest rates and cool the economy is beginning to work.

The Consumer Price Index climbed 5 per cent in the year through March, down from 6 per cent in February. That marked the slowest pace of price increases since May 2021.

But the details of the report underlined that inflation retains concerning staying power under the surface: A so-called core index that aims to get a clearer sense of price trends by stripping out food and fuel costs, both of which can be volatile, picked up by 5.6 per cent from a year earlier.

That was up slightly from February’s 5.5 per cent increase, and it marked the first acceleration in the yearly number since September.

Markets still see one more 25-point rate hike as being needed from the US Federal Reserve.

Taken in total, the fresh inflation data suggested that price increases were meaningfully moderating, but that progress remained gradual. And that mixed signal comes during a challenging economic moment for the Fed.

The central bank is the government’s main inflation fighter, and it has been trying to wrestle price increases back under control for slightly more than a year, raising interest rates to nearly 5 per cent from near zero as recently as March 2022 to slow the economy and weigh down costs.

Officials are now assessing how their policy changes are working, and they are trying to gauge whether they need to do more to ensure that price increases will come fully under control. Inflation has been decelerating after peaking at about 9 per cent last summer, but the process has been slow.

It remains a long way back to the 2 per cent inflation that was normal before the onset of the pandemic in 2020.

Uncertainty over how quickly and completely price increases will cool is being compounded by recent developments.

A series of high-profile bank blowups last month could restrain the economy — perhaps even enough to plunge the economy into a mild recession later this year, based on Fed staff forecasts. Some Fed officials are urging caution in light of the turmoil, even as others warn that the central bank should keep its foot on the economic brake and remain focused on its fight against rising prices.

The new data probably “solidifies the case for the Fed to do another hike in May, and to proceed cautiously from here,” said Blerina Uruci, chief US economist at T. Rowe Price.

She said the fresh report offered good news, but “it will take time to bring inflation down”.

Fed officials’ inflation target of 2 per cent is defined using a different index: the Personal Consumption Expenditures measure, which uses some data from the consumer price measure but is calculated differently and released a few weeks later.

That measure has also been sharply elevated, though it, too, is moderating.

The White House welcomed the latest inflation news on Wednesday, emphasising that slower price increases mean more “breathing room” for families.

As financial markets settled after the data release, both stocks and bonds showed little change, suggesting investors viewed the numbers as being in line with the current outlook for the economy.

Yet the report also marked a less optimistic milestone: Inflation has been high in America for two full years now, having first started to pick up in March 2021.

A jump in goods prices initially pushed inflation higher that year, though that has faded as supply chains have healed and product shortages have cleared.

Likewise, a sharp run-up in food and fuel prices tied to Russia’s invasion of Ukraine in 2022 sharply sped up inflation but has now pulled back. Today, most of the nation’s inflation is coming from service costs, which include purchases like rent, hotel rooms, manicures, insurance and childcare.

Given that, the Fed is closely watching the cost of services for a sense of whether price increases are poised to come down — and they cooled somewhat in March. One measure of services, excluding housing and fuel-related prices, produced by Bloomberg showed easing to 5.7 per cent on an annual basis in March, which is a firm reading but less rapid than 6.1 per cent in February.

“There are signs in the details to suggest we’re making some progress toward slowing inflation,” Uruci said. “It’s not where it needs to be, but it’s progress.”