Inflation likely moderated in March, but with worrying signs below the surface: a closely watched measure of key price increases is expected to pick up again after five months of slowdown.
The consumer price index, due Wednesday morning, likely rose 5.1 percent in the year to March, according to a Bloomberg survey of economists, down from 6 percent in February.
But a so-called core index that aims to get a clearer picture of price trends by stripping out food and fuel costs, both of which can be volatile, is likely up 5.6 percent. That would be faster than February’s 5.5 percent increase and the first acceleration since September.
That mixed picture will come at a difficult economic time for the Federal Reserve, the government’s main inflation fighter. The central bank has been trying to rein in price rises for just over a year, raising interest rates to nearly 5 percent from near zero by March 2022. Inflation peaked in around 9 percent last summer, and although it is moderating. , the process has been bumpy and gradual. It remains a long way from the 2 percent inflation that was normal before the start of the pandemic in 2020.
“Inflation was never expected to decelerate in a straight line,” Pimco economist Tiffany Wilding wrote in a note ahead of the release. “Despite this report,” he wrote, analysts at the firm expected inflation to continue to decline this year.
Uncertainty about how quickly and fully price increases will cool has been exacerbated by recent developments. A series of high-profile bank robberies last month could slow the economy, but it’s unclear to what extent. Some Fed officials are urging caution in light of the turmoil, though others warn the central bank should keep its foot on the economic brake and stay focused on its fight against rising prices.
Fed officials aim for 2 percent inflation, but they define it using a different index: the measure of personal consumption expenditures, which uses some data from the consumer price measure but is calculated differently. The measure, which is released just weeks after the consumer price index, has also risen sharply.
On Tuesday, John C. Williams, the president of the Federal Reserve Bank of New York, said the Fed had more work to do to reduce rate hikes and suggested the central bank’s March forecast of a move more of a quarter point type was still a “reasonable starting point”.
But Austan D. Goolsbee, the president of the Federal Reserve Bank of Chicago, suggested that recent bank failures could make it harder for businesses and consumers to access credit, slowing the economy, fueling uncertainty and creating a “need to be cautious”.
“We should gather more data and be careful about raising rates too aggressively until we see how much work the headwinds are doing to reduce inflation,” Mr. goolsbee
The Fed’s latest estimates, released shortly after the collapse of Silicon Valley Bank and Signature Bank in March, suggested officials could raise rates another quarter point to just above 5 percent. The central bank will announce its next policy decision on May 3.
Higher interest rates have made it much more expensive to borrow money to buy a home or expand a business. This is slowing down economic activity. As demand cools and the labor market softens, wage growth also moderates.
This could help pave the way for cooler inflation. When wages rise quickly, businesses can charge more to try to cover their labor bills, and their customers are likely to be able to afford the higher prices. But as households become more cash-strapped, it could be harder for companies to raise prices without scaring away shoppers.
Fed officials are closely watching inflation in services, and in particular services beyond housing, to see if price increases are about to fade.
