US: Inflation Reaches (Another) Multi-Decade High

Consumer price inflation continued to accelerate in March, rising 1.2% month-on-month (m/m) – the fastest month-over-month pace since September 2005. On a year-over-year (y/y) basis, inflation was 8.5%, marking yet another multi-decade high.

Gasoline prices remained a key contributor to price growth, rising by 18.3% m/m and accounting for over half of the total increase in headline inflation. Food prices were also up 1.0% m/m in March, and 8.8% relative to year-ago levels.

Core (excludes food and energy) inflation rose 0.3% m/m, a step down from the previous month’s 0.5% m/m gain. On a year-over-year basis, inflation ticked up a tenth of a percentage point, rising to 6.5% y/y.

Shelter costs were again a key contributor to core price growth – accounting for nearly two-thirds of the increase – and rising 0.5% m/m, with both rent of primary residence and owners equivalent rent notching gains of 0.4% m/m. Having said that, price increases were relatively broad-based across most categories, with airline fares (10.7% m/m), transportation (2.0% m/m) & medical (0.6% m/m) services, and motor vehicle insurance ( 0.7% m/m) all up in March.

Core goods prices fell by 0.4% m/m, with all categories showing a deceleration (or decline) on the month. Of note was the decline in used vehicle prices (-3.8% m/m), which has now fallen in each of the last two months. New vehicle (0.2% m/m) prices, however, were up modestly in March, though price growth has shown signs of cresting here as well in recent months. Relative to year-ago levels, new and used vehicle prices are still up 12.5% ​​and 35.3%, respectively.

Key Implications

As expected, price pressures continued to mount in March, as higher food and energy prices remained key contributors to last month’s price gains. Over the near-term, we should see some reprieve in gasoline prices, as WTI has moved sharply lower in recent weeks following separate announcements from both the US and International Energy Agency to release some reserves of oil.

The decline in core goods prices is an encouraging development, though we caution reading too much into this over the near-term. Most of the decline was concentrated in used vehicle prices, which are highly volatile and still suspectable to ongoing supply shocks. Both new and used vehicle inventories remain historically low and ongoing supply chain disruptions – largely stemming from China lockdowns and semiconductor shortages – will continue to weigh on auto production this year, keeping the market undersupplied and prices elevated.

Having said that, the notable increases in some price categories which were heavily impacted by COVID restrictions (airline, public transportation, etc.) is showing that consumer spending is starting to “normalize”. This should result in increased spending in consumer services, helping to ease some of the demand-side cost pressures on goods.

With price pressures continuing to mount and the labor market remaining as tight as ever, there is no doubt the Federal Reserve will be raising rates at its next policy announcement on May 3rd-4th. Markets are largely priced for a 50-basis point rate hike, and we fully expect the Fed to use this opportunity to accelerate the removal of monetary accommodation.

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