Annual inflation eased in the United States in March as lower gasoline and food prices brought some relief to households battling soaring prices, but it likely turned out to be quite steep for the Federal Reserve to keep raising interest rates.
The government said on Wednesday consumer prices rose just 0.1% from February to March, down from 0.4% from January to February. This was the smallest monthly increase since December.
Measured from a year earlier, prices rose just 5.0% in March, down sharply from February’s 6.0% annual increase. It was also the lowest annual inflation in almost two years. Much of the decline was attributable to falling prices for goods such as gasoline, used cars and furniture, which had soared a year ago after the invasion of Ukraine by Russia.
Excluding more volatile food and energy prices, so-called core inflation remains stubbornly high. Underlying prices rose 0.4% from February to March and 5.6% from a year earlier. The Fed and many private economists view core prices as a better measure of underlying inflation. The year-over-year figure rose slightly in March for the first time in six months.
Towards another rate hike?
Price increases in the vast service sector of the economy—ranging from rent and restaurant meals to haircuts and car insurance—keep underlying inflation high, at least for the moment. This trend is expected to lead the Fed to raise its benchmark interest rate for the tenth consecutive time at its meeting in May.
Still, there were positive signs in Wednesday’s report that suggested inflationary pressures were cooling. Rental costs rose 0.5% from February to March, which remains high, but represents their smallest increase in a year. Grocery prices fell 0.3%. It was the first such drop in two and a half years, and a welcome respite for Americans suffering from painfully high food costs.
Used car prices, which were an early driver of high inflation, fell 0.9%, registering a ninth consecutive monthly decline. Gasoline prices, which fell just 4.6% from February to March, have fallen 17% over the past year.
Fed officials have forecast that after another quarter-point hike next month — which would take their benchmark rate to around 5.1%, its highest point in 16 years — they would pause hikes. , but would leave their policy rate high until the end of 2023. But officials warned they could raise rates further if they deemed it necessary to rein in inflation.
When the Fed tightens credit in an effort to cool the economy and cool inflation, it typically results in higher rates on mortgages, auto loans, credit card borrowings, and many business loans. The risk is that ever-higher borrowing rates will weaken the economy to the point of triggering a recession.