The consumer price index (CPI) slipped 0.1% in March compared to February but jumped 2.4% compared to a year ago. That was the fastest 12-month gain in a year and validated the Federal Reserve’s assumption that the moderation in inflation last year was, in fact, transitory. Core CPI (excluding food and energy) rose 2.1% on a year-over-year basis, the fastest pace in more than a year.
Much of the surge appeared in services, which is where we expect wage-based inflation to show up first. Every CEO I have spoken with in recent weeks has complained about rising wages at all skill levels. The pressure in the service sector also showed up in the Producer Price Index (PPI), which is an indicator of pipeline inflation. It surged 3% compared to March last year; inflation in services was the primary driver there too.
We are seeing transportation and shelter costs move up. The rise in transportation costs is to be expected given the ongoing shift to online shopping and a rebound in manufacturing activity; costs are escalating rapidly in the trucking industry. Increasing shelter costs are raising concerns about affordability and whether the government is fully accounting for the bite housing is taking out of consumer budgets; that could leave less for spending elsewhere.
Inflation hawks on the Fed will feel vindicated by the data. Look for the Federal Open Market Committee (FOMC) to affirm its commitment to a June rate hike. Our forecast holds for three more rate increases this year at the least, barring further escalation in geopolitical tensions.
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