Gas Prices Spark CPI Jump in March

The Consumer Price Index (CPI) jumped 0.4% in March, more than expected, on the heels of higher prices at the gas pump. The rise in gasoline accounted for 60% of the increase in prices last month. Higher food and shelter costs also contributed. Compared to last year, the index rose to 1.9%, the hottest pace since late 2018.

The core CPI (nonfood and energy, the best predictor of future inflation) edged up just 0.1% for the month. On a year-over-year basis, core CPI rose 2%, marking a further deceleration. The weakness was largely in apparel prices, which plummeted 1.9% during the month alone. That was the worst drop in apparel prices in almost seven decades and was likely due to a change in methodology on how apparel prices are calculated.

We also saw weakness in the cost of wireless phone services during the month. This is a factor that held down inflation earlier in the cycle and forced the Federal Reserve to the sidelines longer than it had hoped during former Fed Chair Janet Yellen’s term.

Shelter costs moved up, this time driven by lodging costs. Housing appreciation has slowed considerably in recent months, which should show up as a moderation in shelter costs in the months to come.

Today’s data, with a further deceleration in underlying inflation, should affirm the Fed’s recent decision to move to the sidelines on rate hikes. The core CPI tends to run hotter than the Fed’s core PCE (Personal Consumption Expenditures) target, which means that inflation is still below its 2% target.

The Fed has been surprised that the recent uptick in wages has not pushed price levels much higher. Indeed, we would now need to see a sustained increase in core inflation for the Fed to raise rates in 2019. Our forecast for no move by the Fed still holds.

Bottom Line
The moderation in inflation that saw take hold in late 2018 persists. The Fed will not raise rates in response to higher prices at the pump unless those increases spread to other parts of the economy.

Ironically, one of the administration’s nominees to fill a seat on the Federal Reserve’s Board of Governors, Stephen Moore, has argued that the Fed should base its decisions on shifts in commodity prices. He was using a sustained drop in prices to justify a rate cut a few months ago. One would assume higher prices at the pump would change his position; it has not.
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