The Consumer Price Index (CPI) rose by 0.3% in March, in line with expectations but also at a pace slightly slower than the previous month. Year-over-year, the CPI also trended modestly lower in March, increasing 2.7%. Core CPI, which excludes food and energy, increased 0.2% for the month, pushing the year-over-year core rate up to 2.3%. Combined, the data suggests that broad inflationary pressures are easing modestly, but core price pressures remain a bit above the Fed’s target.
Upward pressure on oil and gasoline prices dipped considerably. The combination of temporary easing in tensions in the Middle East and slowdown in global growth expectations has helped to curtail the advances in oil prices, temporarily mitigating fear about oil acting as a catalyst for the onset of another recession.
Despite the easing in inflationary pressures, consumers remain constricted by limited income gains. On an inflation-adjusted basis, average hourly earnings fell for the third consecutive month in March. In the past year, real average hourly earnings have declined 0.6%.
Consumer spending is the single most important driver of the U.S. economy, and the improvement in consumer confidence over an extended period could support a greater willingness to spend. Setting willingness aside, however, limited income growth will likely continue to create a practical limit to consumers’ ability to continue to ramp up spending. Looking forward, expectations are for relative price stability, allowing the Fed to retain its accommodative stance.
Recently, economic data has been mixed, but the seeming momentum in recent months may be faltering. With the unseasonably mild winter behind us, significant questions remain about whether data was overstated due to faulty seasonal adjustments. Moreover, some of the surge in activity may have been nothing more than the typical spring pickup occurring earlier than normal because of the moderate weather conditions. The impact of these factors should become more apparent over the next few months, with the potential for data to fall short of expectations as those tailwinds become headwinds.