Consumer Prices Pull Back in March

A reversal in gasoline prices helped push the headline Consumer Price Index lower in March, down 0.2 percent. The low pace of consumer price inflation remains favorable to current Fed monetary policy.

Gasoline Prices Retreat

Consistent with the main storylines reported from last week's import price index and PPI reports, the headline Consumer Price Index (CPI) pulled back in March, down 0.2 percent, following the 0.7 percent increase registered in February. That is the first monthly decline in headline CPI in four months. In all three March inflation reports, energy price reversals proved to be the dominant driver. After jumping 5.4 percent in February, energy prices declined 2.6 percent last month, with most of the downward action coming from gasoline prices, down 4.4 percent. In February, retail gasoline prices spiked 40 cents bringing the average price to $3.85 per gallon. Since then, gasoline prices have trended lower, presently at $3.61 per gallon, reflecting, in part, sluggish demand and outlook concerns. With crude oil and wholesale gasoline prices continuing to fall, retail gasoline prices should provide further downward pressure on headline CPI over the next month or so.

Food price inflation was also rather tame on the month. The index for food was unchanged in March as a 0.2 percent gain in food-away-from-home offset a 0.1 percent decline in prices of food at home. By product, the dairy group produced the largest decrease on the month, falling 0.6 percent. Prices for fruits and vegetables also fell, down 0.4 percent, while cereal and baker products increased 0.2 percent. Year-over-year, total food prices are up a manageable 1.5 percent.

Excluding food and energy, consumer prices were mixed, as the core CPI edged up a softer-than-expected 0.1 percent. As seen from the middle chart, the gap between core goods and core services remains wide. Reflecting, in part, consistent increases in shelter costs, transportation services and medical services, the core CPI services index is up 2.5 percent year-over-year. In particular, shelter costs, which comprise nearly 32 percent of the core CPI, were up 0.2 percent last month and 2.2 percent over the past year. Core goods prices on the other hand have moderated to a flat year-over-year pace, reflecting sluggish consumer demand. While used car and truck prices increased for the third straight month in March, the year-over-year pace is up a paltry 0.1 percent.

Inflation Outlook Favorable to the Fed

Today's report remains favorable to the Fed's outlook and to its highly accommodative monetary policy. At a 1.5 percent year-over-year pace, headline CPI is well below the longer-run target of 2 percent and allows the Fed to maintain the current policy course. Modest employment and income gains combined with soft demand and contained inflation expectations continue to paint a picture where consumer inflation should remain low and, therefore, beneficial to the U.S. consumer over the near-term.

IMOH, Clement I.
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