In year-over-year terms, the inflation rate slowed to 5%, the lowest since May 2021 and down from the peak of 9.1% last June. Core CPI, which excludes food and energy prices, increased 0.4%. Both bond and equity markets rallied after the release.
Today's report provides clearer signs that inflation is cooling off. Over the past few months, shelter has been one of the biggest inflation drivers, even though data on new leases shows that rent increases have slowed sharply. In March, rent of primary residence slowed to 0.5%, down from 0.8% in February, and given the lags in the data, it is likely that rents will continue to slow over the course of 2023. As shown in the chart, at long last it appears that core services inflation has peaked. In the other direction, it appears that the period of maximum deflationary pressure on goods is also over. Some prices that became overheated at the height of the pandemic have fallen back to more normal levels, leaving less room for further declines. We expect goods inflation to remain subdued, but it is unlikely to drag down overall inflation as much as it has in recent months.
In our view, the data will not be enough for the Fed to declare victory over inflation, and we look for another rate hike at the next FOMC meeting on 3 May. However, if the data continues to show the labor market and inflation cooling off, this could be the last hike of the cycle.
Main contributor: Brian Rose, Senior US Economist, CIO America
Content is a product of the Chief Investment Office (CIO).
Original report - Clearer signs of inflation cooling , 12 April, 2023.