March CPI: Another sticky inflation report to cap Q1

Summary

The March CPI data once again came in a bit too hot for comfort. Both headline and core CPI rose 0.4%, and although the latter increase was a "low" 0.4% gain (0.36% unrounded), the three-month annualized rate of core CPI inflation climbed to 4.5%, the fastest pace since May 2023. Jumps in gasoline (+1.7%) and electricity (0.9%) prices helped push the headline CPI higher, while a benign 0.1% increase in food prices restrained consumer inflation during the month. Core goods deflation returned in March after a brief hiatus in February, with prices for core goods falling 0.2%. A drop in used and new vehicle prices led the decline. Core services inflation remained firm at 0.5% amid sizable price increases for medical services as well as motor vehicle insurance and maintenance.

Despite the acceleration in core prices in Q1, we still expect inflation to trend lower throughout the year, but progress will likely be gradual. Shelter disinflation is still ongoing through the month-to-month noise, and lower prices for vehicles should eventually put downward pressure on vehicle-related services inflation, such as insurance. A better balance between supply and demand in the labor market has led to steady cooling in labor cost growth, and this also should help reduce services inflation as the year progresses.

That said, today's inflation data are likely to keep the FOMC's doves on the defensive while providing more ammunition to the Committee's hawks, who are increasingly of the view that there is no rush to start cutting the fed funds rate. Even if the inflation data cool gradually in the months ahead as we expect, a solid labor market and tranquil financial conditions afford the FOMC more time to await additional data that confirms inflation is on a downward-albeit-bumpy path back to 2%. We now project two 25 bps rate cuts in Q3 and Q4 of this year as our base case for the fed funds rate. We will publish our monthly economic forecast update tomorrow morning that will more fully flesh out our views and projections for economic growth, inflation and interest rates.

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