The US Consumer Price Index (CPI) for March beat economists’ expectations of 0.5% to come in at 0.6% for the month, the highest monthly reading since August 2012, with the annualized reading indicating an increase of 2.6%.
Stripping away volatile food and energy prices, the core reading saw an increase of 0.3%, or 1.6% annually, when the street was expecting a 0.2% increase.
The high year-over-year levels in part reflect the fact inflation slumped sharply in March of last year as the pandemic spread rapidly around the world, shutting down key economies and suppressing consumer demand.
Not surprisingly, the data had a muted effect on markets across the board, and are taking a back seat to headlines about the US Food and Drug Administration halting Johnson and Johnson vaccine rollouts.
Driving prices notably higher in March were price increases at the gasoline pumps, which registered a 9.1% increase, and in food and accommodations. This was to be expected, as demand for energy increases in lockstep with factories and plants reopening, and restaurants were able to begin serving patrons indoors.
Grocery prices saw a notable 3.3% increase as all six subcategories contributed their fair share of the gains.
Components dragging down the index should come as no surprise. Notable contributors include the airfare and lodging away from home subsector, down 15.1% and 6.4%, respectively.
Traders place a heavy emphasis on increasing consumer prices as they reflect the direction of overall inflation. During normal times, the resurgence of inflation drives central banks to increase short term interest rates in an effort to cool a hot economy and keep inflation in check.
Recently though, a result of the COVID-19 pandemic, the leadership of the Federal Reserve have made no secret that overnight rates are likely to stay where they are for a considerable period, with the Chair Jerome Powell indicating he is comfortable having inflation above its normal 2% target for some time now that the US central bank is focusing on achieving an average of that level over a period of time.
While the inflation numbers are objectively high, markets have not repriced the Fed to hike rates sooner, and are expecting to remain elevated for a few months and then for inflation to come back down.
Should inflation sit above the Fed’s 2% target going into the third quarter, despite Powell’s earlier commitment, markets may force his hand into raising rates sooner.
In the meantime, dance while the music is still playing, but don’t veer too far from the open chair.
Business Development Manager, Canada & Currency Analyst
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