While price increases remain too high to be comfortable for most American consumers and businesses, the overall picture suggested the Federal Reserve might soon be ready to pause its aggressive campaign to raise interest rates to slow the economy. The recent shock to the banking sector, though, is still clouding the central bank’s next move.
Housing costs were by far the largest contributor to the monthly price increase in March, more than offsetting a 3.5 percent drop in the energy index. Rents rose 0.5 percent in March, though that was a slower pace than the previous month.
Car insurance (up 1.2 percent), airfares (4 percent), household furnishings (0.4 percent) and new vehicles (0.4 percent) all saw increases in March.
Energy costs are down significantly from a year ago — which was right after Russia invaded Ukraine and upended global energy markets. That helped the overall inflation number tick down a full percentage point.
But a narrower measure that strips out volatile categories like food and energy broke a monthslong downward streak and came in a bit hot, rising 5.6 percent over the previous year, and 0.4 percent over February. That’s in large part because shelter costs get even more weight in what’s known as “core inflation,” which is intended to help economists and policymakers see through choppy data.
Yet there were signs of encouragement in costs for medical care and used cars and trucks, which fell 0.3 and 0.9 percent over the month, respectively. Compared to last year, used car prices are down 11 percent.
Overall, the report gave the markets and Fed watchers confidence that the central bank’s aggressive rate hike campaign could be nearing its end.
“Markets will likely react favorably to this report as investors gain more confidence that the next Fed meeting may be the last meeting when the Committee raises the fed funds target rate,” Jeffrey J. Roach, chief economist at LPL Financial, wrote in an analyst note.
Indeed, investors breathed a sigh of relief. The Dow Jones industrial average jumped 159 points, or 0.47 percent at the open. The S&P 500 popped 0.49 percent, and Nasdaq composite 0.64 percent.
Inflation is trending in the right direction, and March marked the ninth straight month of easing after last year’s spike. But consumer prices remain well above normal levels, and a hodgepodge of data makes it difficult to gauge whether the economy is slowing enough. The labor market is still churning, for example, but at a slower pace. Americans pulled back on spending in February, but consumers spent more heavily in January than they had in December. Average gas prices have fallen since surging past $5 a gallon last year, but they could be on the upswing again after Saudi Arabia and other leading oil producers said they would slash output by more than 1 million barrels a day starting in May.
“There’s great news relative to a year ago,” said Diane Swonk, chief economist at KPMG. “But it’s not as if prices are cheap.”
To get the economy back to normal, the Federal Reserve is raising interest rates, hoping it can get borrowing costs high enough to cool demand without forcing a recession. The central bank has raised rates nine times since March 2022, and it’s probably on track for one more hike in May before hitting pause and letting its work filter through the economy. Economists expect that the Fed’s policy rate, known as the federal funds rate, will ultimately hover around 5.25 percent and stay there through 2023. That rate is between 4.75 and 5 percent now.
But policymakers’ careful planning has been repeatedly thwarted by shocks beyond their control, from supply chain issues to Russia’s war in Ukraine. Most recently, the failure of two banks triggered panic throughout the banking system and caused the Fed and other regulators to launch an emergency intervention to stave off broader contagion.
That raised new questions about the ways higher borrowing costs can fuel instability in the financial system, and whether banks are adequately preparing themselves for an environment where rates stay higher for longer.
Any repercussions from last month’s two-week banking episode weren’t expected to show up in the March inflation report. But Fed officials do believe the bank failures will eventually slow the economy down by tightening credit conditions in ways that mimic interest rate hikes — as banks become more risk-averse, they’ll issue fewer loans.
“You can think of it as being the equivalent of a rate hike or perhaps more than that,” Federal Reserve Chair Jerome H. Powell said last month. “Of course, it’s not possible to make that assessment today with any precision whatsoever.”
Much depends on what happens in the rest of the economy. The Fed has recently focused its attention on inflation coming from the services sector, such as leisure, hospitality and health care. The concern there is that labor shortages are putting pressure on wages, as hospitals are desperate to hire nurses and as hotels are stretching to meet spring and summer travel. That drives up prices, in turn, as companies charge more to cover higher labor costs.
But the Fed has not seen enough relief in other parts of the economy, either. In the housing market, rising interest rates triggered a huge run-up in mortgage costs, which can cause buyers to bow out of the market or drive prices down. That slowdown hasn’t meant much in the rental market, though. Rents on new leases are moderating in some parts of the country. But those gains are still being offset by rising rents for many tenants who are renewing existing contracts.
Then there’s the energy sector, which was roiled by Russia’s invasion of Ukraine last year. Gas prices are expected to jump again after the oil-producing bloc known as OPEC Plus announced plans to significantly slash production. The average gallon of gas in the United States cost $3.62 on Wednesday, according to AAA, and some analysts expect that if demand picks up over the summer, drivers could see prices at the pump pass $4 again later this year.
In the auto sector, wholesale used cars prices have risen more than expected this year. That has car experts bracing for a larger rise in retail prices, since dealers who are paying more for cars at auction will pass higher prices onto consumers.
“It seems only a matter of time, likely in the March-to-May [consumer price index] releases, for it to start showing up in the CPI data,” Skanda Amarnath, executive director at Employ America, a left-leaning think tank, wrote in a blog post Tuesday. “Adding insult to injury, higher automobile prices also affect service prices the Fed presumes to be more labor market-driven: the price of renting, leasing, repairing, and insuring a car have all shown sensitivity to auto prices.”
At New Life Auto Sales, high wholesale prices have “been the story all along,” said general manager Horace Bruce. The used car dealer in Charleston, S.C., focuses on models under $20,000, and consistent customer demand has kept business strong. Bruce said that people have learned “not to get too picky” about sticker price and that if they like one of the 50 cars he’s got on the lot, they should buy it.
But Bruce said his business comes down to supply and demand. He doesn’t see wholesale prices moderating until the chip shortage is fully resolved and sales of new cars pick up, so that those models can trickle down into the pre-owned market.
“If I had a crystal ball, I’d be rich,” Bruce said. “But I don’t know what the future holds.”