Inflation in the United States cooled further in March, with the consumer price index (CPI) rising 0.1% month-over-month after adding 0.4% in February.
For the 12 months to March 2023, inflation rose 5% after adding 6% in February, marking the smallest 12-month increase since the period ending May 2021.
This was modestly better than the Street’s expectation of a 0.2% increase month-over-month and an annual increase of 5.1%.
The core CPI, which excludes food and energy, rose 0.4% month-over-month in March, down from a 0.5% increase in February, in line with analysts’ expectations.
The core inflation rate rose 5.6% in the 12 months ending in March, also as expected, compared to a 5.5% increase in February.
Market increasingly confident in Fed rate cut
While March’s CPI report shows improvement, inflation remains far higher than the Federal Reserve’s target of 2% leaving investors to speculate over the central bank’s next move in terms of interest rate hikes.
Heading into the report, the market was pricing in a 70% probability of a 25 basis point rate hike in May. However, this had fallen slightly to 65% after the data was released, noted FOREX.com market analyst Fiona Cincotta.
“The market is increasingly confident that the Fed will be cutting interest rates aggressively by the end of the year,” Cincotta said.
“As a result, stocks are rising, led higher by the Nasdaq as high-growth tech stocks have the most to benefit from lower interest rates. The USD has fallen sharply and gold rises above $2020.”
Evelyn Partners chief investment strategist Daniel Casali said the risk for the Fed now was that it overtightens policy and this leads to a financial crunch in the banking sector, which could in retrospect at least, make the failure of Silicon Valley Bank and Signature Bank last month the canary in the coal mine.
“Although there are still pockets of inflation in the economy, the Fed Funds rate is now higher than Fed forecasts of underlying inflation, and this positive real interest rate indicates that policy is already restrictive,” he said.
“However, the Fed will be aware that there are inflation drivers that are outside of its control, particularly energy prices. OPEC’s recent production cut has given a boost to crude oil prices and complicates the job of the Fed to bring down inflation. So, despite the hawkish rhetoric from FOMC members, the Fed may be reluctant to raise rates too far.”
Casali highlighted that the annual headline inflation rate had now receded for nine consecutive months.
“Base effects, where inflation rose sharply on a monthly basis in the first half of 2022, should continue to drag on the annual rate, at least up until June,” he said.
“Critically, lead indicators such as falling job openings and lower selling prices from the National Federation of Independent Business small business survey, indicates that core CPI inflation is set to slow over the coming months.”
Energy price outlook justifies 'higher for longer'
Titan Asset Management chief investment officer John Leiper noted core inflation remained stubbornly high at 5.6% and an increasingly bullish outlook for energy prices will continue to justify “higher for longer” when it comes to interest rates.
“We are heading into recession and whether we get an additional rate hike or not, inflation remains an issue, despite today’s number,” he said.
“The writing is already on the wall.”
Contact the author at emily.jarvie@proactiveinvestors.com
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