Underlying inflation simmers

The consumer price index (CPI) cooled to a 0.1% pace in March, after rising 0.4% pace in February. That translates to a gain of 5.0% from a year ago in March, down from 6.0% in February. A double-digit 17.4% drop in prices at the gas pump from a year ago accounted for more than half of that slowdown in overall inflation. Oil prices spiked a year ago after Russia’s invasion of Ukraine.

Food prices moderated and are finally tracking below a double-digit gain from a year ago. Egg prices dropped 10.9% after surging late last year and in early 2023. They are still up 36% from a year ago, which is hard on low-income households, which rely on eggs as a primary protein. We are finally getting past the shortages in both eggs and poultry due to global bird flu outbreaks. The annualized rate of inflation, which better tracks momentum, cooled to 3.8% in the first quarter after rising at a 4.2% annualized pace in the fourth quarter.

Core (ex-food and energy) CPI rose 0.4% in March, after rising 0.5% in February. That translates to a 5.6% increase from a year ago, slightly hotter than we saw in March. The core CPI rose at a 5.0% annual rate in the first quarter, down an almost imperceptible 5.1% pace from the fourth quarter.

Shelter costs moderated slightly to a 0.6% pace in March, after rising at a 0.8% pace in February. The deceleration is welcome news for the Federal Reserve, which is counting on a deceleration in rents to cool inflation this year. However, the pace of increases is still red hot.

Hotel room rates jumped 3.1% during the month and were up 8.1% from a year ago. That reflects the surge in those on vacation for spring break, the ranks of which hit another monthly record in March. That was despite unusually cool weather; it snowed in places where the sun usually shines this time of year.

Goods prices were mixed. New vehicle prices picked up, despite huge affordability hurdles, while prices for used vehicles continued to decline. Brace for a surge in used vehicle prices in April, given supply shortages and a spike in wholesale prices during the first three months of the year. A shortage of vehicles coming off lease two years ago pushed up wholesale prices; it takes two to three months for those hikes to show up on dealer lots.

Big-ticket, housing-related items cooled in March, but remained buoyed by the push to remodel what has become a much older and dilapidated, existing stock of homes. Credit conditions for remodeling projects are rapidly tightening. Those shifts are expected to put a crimp in remodeling activity as we get into Summer.

Core services CPI (excluding shelter and energy), which the Fed watches most closely, were up 0.4% in March, close to the 0.5% pace in February. That translates to a 5.8% year-over-year increase, down from 6.1% in February. The core services slowed to an annualized 4.8% in the first quarter from a 5.3% pace in the fourth quarter. A sharp drop in the cost of medical care services was the primary drag on service sector inflation during the month. Vehicle rental prices are also moderating and down finally off the sky-high rates of a year ago.

The problem is that the CPI does not measure medical services and airfares the same as the personal consumption expenditures (PCE) index, which the Fed targets. Both have been running much hotter in the PCE index, which makes the slowdown in core services inflation a bit of a head fake.