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.
