By Jeanna Smialek
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% in the year through March, down from 6% 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% from a year earlier. That was up slightly from February’s 5.5% increase and marked the first acceleration in the yearly number since September.
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% 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% last summer, but the process has been slow. It remains a long way back to the 2% 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 U.S. 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% 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, although it too is moderating.
The White House welcomed the latest inflation news Wednesday, emphasizing that slower price increases mean more “breathing room” for families.
“Today’s report shows continued progress in our fight against inflation,” President Joe Biden said in a written statement.
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, having first started to pick up in March 2021.
A jump in goods prices initially pushed inflation higher that year, although 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 child care.
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% on an annual basis in March. That is a firm reading but less rapid than 6.1% 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.”
In a development that caught the attention of many economists, rent of primary residence rose 0.5% from the prior month, down from 0.8% in the previous reading. Housing inflation broadly is expected to slow in 2023, and that appears to be beginning to take hold even earlier than many had expected.
“When you see shelter moderating as much as it did, that’s an unusual thing,” said Neil Dutta, head of economic research at Renaissance Macro. “The moderation in rental inflation has come a bit sooner than anticipated.”
But those hopeful signs do not necessarily mean that inflation will fade smoothly and rapidly. The sharp slowdown in the overall index last month may not continue, since a big chunk of that decline is owed to a drop in gas prices that is unlikely to be sustained. A real-time pump price tracker produced by AAA showed that unleaded gas prices had picked up since last month.
And the inflation report continued to show quick price increases in other categories, including new vehicles and airfares.
Given how stubborn price increases have been proving, some central bankers have suggested that they may need to raise interest rates further to fully bring inflation to heel.
The Fed’s latest estimates, released shortly after the collapses of Silicon Valley Bank and Signature Bank in March, suggested that officials could lift rates another quarter-point this year, to just above 5%. The central bank will announce its next policy decision May 3.