Thoughts

April 10, 2026 | 13:39

U.S. Inflation: Unhappy Fifth Anniversary

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Investors breathed a modest sigh of relief on Friday when the CPI rose “just” 0.9% and core prices advanced a less-than-feared 0.2% in March. The largest monthly rise in gasoline prices on record (21%) spiked the headline figure, partially offset by cheaper groceries, motor vehicles, and medical care. Alas, higher energy costs are baked into the cake for April. The national average price for regular gasoline hit $4.17 midweek, up 40% since the start of the war and 13% above the March average. This means the current headline inflation rate of 3.3% could hit 4% by the Spring, while the core rate of 2.6% may test 3%, and that’s assuming the current ceasefire holds, the Strait of Hormuz reopens, and oil prices reverse course.

Of growing concern to Fed policymakers (according to the minutes of the last meeting) is that inflation progress had already stalled before the conflict. Their preferred measure of inflation is the PCE price index, which covers more items than the CPI and accounts for substitution between faster-rising and slower-rising items, making it a better measure of living cost changes than the fixed-weight CPI. The February PCE report, released Thursday, was sobering, as both headline and core prices jumped 0.4% in the month, keeping the respective year-over-year rates (2.8% and 3.0%) well above the 2.0% target. Worse, core PCE prices are accelerating, rising 4.4% annualized in the past three months. Core commodity prices are up 2.3% y/y, near a three-year high, with pressure in furnishings and household equipment (4.8%) and recreational goods and vehicles (4.4%) possibly reflecting tariff passthrough. However, much of the stickiness in inflation remains concentrated in services, where prices are 3.3% above year-ago levels, led by increases in personal care (7.1%), financial services (6.7%), legal services (6.0%), auto repairs (5.6%), airfares (4.9%), and electricity (4.9%).

Of some consolation, services inflation is at least decelerating, helped by easing rents. In addition, the Cleveland Fed’s median PCE price metric rose a milder 0.2% in February, extending a downward trend in its yearly rate to 2.8%. The Dallas Fed’s trimmed-mean PCE measure was similarly benign, with the yearly rate slipping to 2.3%, the lowest since 2021. Most importantly, long-run inflation expectations appear well anchored despite the spike in fuel costs. Consumers surveyed by the New York Fed in March raised their five-year-ahead expectations by just a tenth to 3.1%, though a further uptick is likely in April according to the University of Michigan.

Still, U.S. inflation remains well above the Fed’s target now for a fifth straight year with little near-term relief in sight. That’s one anniversary the next Fed Chair won’t be celebrating.