US CPI: nearing the peak?

US inflation data for March, released this morning by the Bureau of Labor Statistics, were just about as bad as expected. Headline CPI shot up by 1.2 percent month-on-month, pushing the yearly rate to 8.5 percent from the 7.9 percent recorded in February.  This is the highest annual rate since December 1981.

As has been the case for the last several months, price increases for energy and food led the way again in March. Gasoline prices rose 18.3 percent from February to March as a result of the Russian invasion of Ukraine. This accounted for half of the monthly rise in the headline figure. Food prices rose 1.0 percent in the month, led once again by the food-at-home (aka groceries) sub-component. Over the past twelve months, the energy price index has risen 32 percent, with food rising 8.8 percent, its fastest pace in more than four decades.

Stripping out these volatile components gives a somewhat less extreme reading, but not one that can provide much solace to policymakers. The annual rise for core CPI was 6.5 percent, still far in excess of the Fed's 2 percent goal. In one mildly encouraging sign, the monthly increase in core CPI slipped to 0.3 percent in March from 0.5 percent in February. However, not too much can be read into this: the slower growth of core CPI entirely reflected a decline in used car prices, not an item that provides much relief for American consumers' finances on a daily basis. Aside from that one item, the remaining subcomponents of the index continue to show broad-based price pressures. 

There are two seemingly contradictory things that can be said about the current situation: there is little that the Federal Reserve can do to address the underlying causes of the spike in prices, and it is way past time for the Fed to do something about inflation. The inflation spike is the result of the ongoing global supply chain issues, severely exacerbated by the Russian invasion. There is nothing the Fed can do about that. 

However, there is a growing risk, as recent Fed speakers have acknowledged, that rising inflation expectations, both for consumers and businesses, will become entrenched, making the Fed's job much harder in the medium term. The latest survey from the New York Fed shows that US consumers expect CPI to rise 6,6 percent in the next twelve months and, arguably more ominously, to average 3.7 percent in the next five years.

It is quite possible that we are at or very near the peak of the current inflation surge.  There has been some pullback in retail gasoline prices, and that should translate into a lower headline CPI reading for April.  That said, the rise in inflation expectations, which the Fed repeatedly fretted about but did little to address, needs a  prompt and strong response, in the form of a 50 basis point rate hike in early May, with the explicit threat of more of the same to come.