US CPI: More strength in core inflation to come - Wells Fargo

Analysts from Wells Fargo continue to see a firm trend in infaltion in the US despite today’s data that showed a decline in March of 0.1% in CPI. 

Key Quotes: 

“CPI inflation fell 0.1 percent in March, the first monthly decline in a year. March’s decline can be entirely traced to energy, where prices fell 2.8 percent. The cost of energy services dipped slightly last month, but the primary source of the pullback was a 4.9 percent drop in gasoline prices. Elsewhere, however, price gains were stronger and point to inflation continuing to firm.”

“After what had been the strongest three-month run in 10 years, the core index increased 0.2 percent (0.18 percent).”

“It was this time last year that core inflation posted a surprising decline due to the now-infamous drop in wireless services. The index fell 0.1 percent—a rare event outside of a recession. With the drop now a full year behind us, the 12-month rate of core inflation jumped from 1.8 percent to 2.1 percent. 

“While the 12-month change has been helped by an easy base comparison, we believe there is more strength to come even without such a favorable comparison over the next few months. Core CPI has increased at a 2.9 percent annual rate over the past three months, which points to the year-ago rate of core CPI climbing a bit further in the months to come. We look for the core index to increase 2.2 percent year-over-year in the second quarter.”

“FOMC Chair Powell and other members have been aware of the favorable arithmetic surrounding the year-ago rate of core inflation, so the jump in March is unlikely to alter their view of inflation. What we believe is likely to be more influential in the Fed’s thinking is the strength that has prevailed since late last year, as well as broadening indications of higher input costs for labor and raw materials.”