EconoFACTS

April 12, 2023 | 09:06

U.S. CPI: Taking a Bite Out of Inflation

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)

Lower energy costs and flat food prices took a big chunk out of yearly CPI inflation in March, but services costs remain heated. Consumer prices rose just 0.1% in the month, less than expected, dragged down by declines in gasoline, electricity and piped natural gas. This chopped a full percentage point from the yearly rate to 5.0%, the lowest since May 2021. The big surprise is that food costs were unchanged in the month, with grocery store prices actually falling (-0.3%) for the first time since late 2020.

Still, core prices are running hot, rising 0.38% m/m and 5.1% annualized in the past three months. Moreover, the yearly rate edged up to 5.6%. This was despite a decent deceleration in the two rent metrics to 0.5% in the month and further declines in medical care costs and used vehicle prices. Continuing to add lift were airfares, auto insurance, and new vehicle prices. Core goods prices firmed up, rising 0.2% in the month and 1.5% y/y. But, it's the services sector that remains problematic. Core services, excluding energy and the two rent measures, which loosely tracks Powell's 'supercore' PCE metric, increased 0.4%, holding the 3-month annualized rate at 5.2%, though the yearly rate moderated to 5.8%. Moreover, adding in higher restaurant prices would imply a little more pressure on supercore PCE prices in the month.

Bottom Line: 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 labour market. Another 25 bp rate hike seems likely on May 3.

Table 1 - United States — CPI

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics