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U.S. consumer prices rise solidly; but underlying trend tame

Kitco News

WASHINGTON (Reuters) - U.S. consumer prices increased by the most in 14 months in March, but the underlying inflation trend remained benign against the backdrop of slowing domestic and global economic growth.

The mixed report from the Labor Department on Wednesday was broadly in line with the Federal Reserve’s view of inflation as being “muted,” economists said. The U.S. central bank last month suspended its three-year campaign to raise interest rates, dropping projections for any rate hikes this year after lifting borrowing costs four times in 2018.

“The report will only encourage the Fed to stay parked on the sidelines, awaiting clearer direction on inflation and the economy,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The Labor Department said its Consumer Price Index rose 0.4 percent, boosted by increases in the costs of food, gasoline and rents. That was the biggest advance since January 2018 and followed a 0.2 percent gain in February.

In the 12 months through March, the CPI increased 1.9 percent. The CPI gained 1.5 percent in February, which was the smallest rise since September 2016. Economists polled by Reuters had forecast the CPI climbing 0.3 percent in March and accelerating 1.8 percent year-on-year.

The dollar was little changed against a basket of currencies, while U.S. Treasury prices rose slightly. Stocks on Wall Street were trading mostly higher.

Excluding the volatile food and energy components, the CPI nudged up 0.1 percent, matching February’s gain. The so-called core CPI was held down by a 1.9 percent plunge in apparel prices, the largest drop since January 1949.

The government last month introduced a new method and data to calculate apparel prices. Apparel prices, which had increased for two straight months, trimmed the core CPI by 0.07 percentage point in March. Many economists expected a reversal in April.

“The new price collection methodology for apparel incorporates corporate data from one unidentified department store to complement prior survey-based collection,” said Kathy Bostjancic, head of U.S. Macro Investor Services at Oxford Economics in New York. “The new methodology appears more likely to show large monthly declines due to the lifecycle of apparel.”

In the 12 months through March, the core CPI increased 2.0 percent, the smallest advance since February 2018. The core CPI rose 2.1 percent year-on-year in February.

The Fed, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy. The core PCE price index increased 1.8 percent on a year-on-year basis in January after rising 2.0 percent in December. It hit the Fed’s 2 percent inflation target in March 2018 for the first time in six years.


The February and March PCE price data will be released on April 29. The February data was delayed by a 35-day partial shutdown of the federal government that ended on Jan. 25.

Inflation has remained muted, with wage growth increasing moderately despite tightening labor market conditions. In a statement accompanying last month’s interest rate decision, the central bank described inflation as having “declined” on an annual basis “as a result of lower energy prices.”

The Fed also noted that survey-based measures of longer-term inflation expectations were little changed. Economists said with inflation close to the Fed’s target and the labor market continuing to tighten, financial market expectations for a rate cut this year were misplaced.

“A rate cut this year, as is currently priced in by markets, looks premature in our view,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

A 3.5 percent jump in energy prices in March accounted for about 60 percent of the increase in the CPI last month. Gasoline prices surged 6.5 percent, the biggest gain since September 2017, after rising 1.5 percent in February.

Food prices gained 0.3 percent after accelerating 0.4 percent in February. Food consumed at home increased 0.4 percent. Consumers also paid more for rent. Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 percent in March after a similar gain in February.

Healthcare costs rebounded 0.3 percent after slipping 0.2 percent in February. There were increases in the costs of prescription medication and hospital services.

The cost of new vehicles rebounded 0.4 percent after declining 0.2 percent in February. But there were decreases in the prices of used motor vehicles and trucks, airline fares and motor vehicle insurance.

Reporting by Lucia Mutikani; Editing by Andrea Ricci

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