EconoFACTS

April 12, 2022 | 09:10

U.S. CPI: More To The Core

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)

Underlying inflation eased in March, but it's still too soon to wave the all-clear flag on the inflation front. The CPI rose 1.2%, mostly as expected, lifting the yearly rate to 8.5%, the highest since December 1981. The main culprits were gasoline, zooming 18.3% (contributing to more than half of the headline increase), and food, up 1.0% (1.5% at grocery stores). Food is 8.8% more expensive than a year ago, the most since 1981, and the war in Ukraine, by impeding grain and fertilizer production, threatens to add to the pressure for some time.

Excluding food and energy, core prices rose mush less than expected, by 0.3%, following five straight months of 0.5/0.6% gains. The yearly rate ticked up to 6.5%, the highest since August 1982, though the 3-month annualized rate pulled back to 5.8%. Strong pent-up demand for travel sent airfares and hotel rates soaring 10.7% and 3.7%, respectively. Returning office workers likely pushed clothing prices 0.6% higher, and 6.8% y/y. Medical care costs were boosted 0.5%. Primary rent simmered down to a 0.4% gain following its biggest move in 44 years, while owners' equivalent rent held to a similar robust track. Home prices will need to cool to take ongoing pressure off rents this year. One big driver of core inflation in the past year, used vehicle prices, is now in reverse, down 3.8% in the month (though still up 35.3% y/y).

Services (excluding energy) rose 0.6%, the most in three decades, suggesting lingering underlying pressure, even as goods prices begin to fade.

Bottom Line: The March CPI report is a welcome respite from the sustained heated core increases of late, and fuel costs look to ease in response to the recent pullback in oil prices. However, food, rent, and a few other items look to remain troublesome and act to slow the expected retreat in inflation in the year ahead. The Fed will take a tiny bit of comfort from today's report, but it still has much work to do to restore price stability. Odds of a 50-bps rate hike on May 4 remain high. Tune in to Governor Brainard's interview with the WSJ at 12:10 pm today to see her reaction to the CPI report...it's unlikely she will backtrack on recent hawkish comments ("it is of paramount importance to get inflation down”).

Table 1 - United States — CPI

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

Source: BMO Economics, Haver Analytics