What The US Inflation Data Says


Simon Harvey, Head of FX Market Analysis at Monex Europe | On the one hand, core inflation moderated in March with a sequential slowdown from 0.5% m-o-m to 0.3% m-o-m, while on the other hand, headline inflation beat expectations. Headline inflation rose by 1.2% month-on-month, in line with expectations, while the annualised rate exceeded expectations by 0.1 percentage point to 8.5%.

The slowdown in the month-on-month core CPI to the lowest reading since September 2021 suggests that domestic inflation conditions are starting to cool, warranting a more subdued reaction from the Federal Reserve over the course of the tightening cycle. Moreover, the rise in headline CPI to levels last seen in May 1981 threatens further de-anchoring of inflation expectations and thus a more hawkish Fed stance to contain risks that current inflation will manifest itself more persistently and above the medium-term target.

The market reaction to the data suggests that the first argument was more relevant to market participants. However, markets are unlikely to fully buy into the idea of a more moderate tightening cycle on the basis of a single piece of data.

Within the March CPI basket, energy and food provided the largest month-on-month increase, at 1% and 18.1% respectively. Specifically, within the energy basket, petrol, which rose by 18.3% in March, accounted for 63% of the month-on-month increase in the overall CPI. Given the concentration of inflationary pressures – as evidenced by the divergence between headline CPI and core measures and the Biden administration’s response of releasing a record number of barrels from the Strategic Petroleum Reserve to reduce domestic energy prices – today’s CPI measure is easily contested by those calling for a more restrained reaction from the Fed beyond the next few meetings. Looking at domestic demand-sensitive metrics such as apparel and core services, inflationary pressures are much more subdued, at only 0.0.5 percentmoderate at only 0.6%. Comparatively, previous sources of “transitory” inflation, such as “such as used car prices, are starting to add to deflationary pressures.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.