In March, US consumer prices rose as increased vaccinations and massive fiscal stimulus unleashed pent up demand, kicking off what most economists expect will be a short period of higher inflation.
The report by the Labor Department on Tuesday also shows a lower price of commodity oil as the broader reopening of economy bumps against bottlenecks in supply chain, capacity constraints and higher revaluations.
Fed Chair Jerome Powell and many economists view higher inflation as a transitory, with supply chains expected to adapt and become more efficient. The supply constraints reflect mostly a shift in demand during the pandemic, now in its second year, towards services and away from goods.
Inflation is a process and not a one-time event, said Chris Low, chief economist at FHN Financial in New York. These bottlenecks are one offs; The Fed will not consider action until it views price increases as temporary rather than permanent, something it does not consider possible until the economy is at full employment. The consumer price index jumped 0.6% in February, the largest gain since August 2012 after rising 0.4% in February.
A 9.1% increase in the gasoline prices accounted for nearly half of the increase in the CPI. In February, fuel prices rose 6.4%, food prices increased 0.1%. The cost of food consumed at and away from home also rose 0.1%.
Economists polled by Reuters had forecast the CPI to move 0.5% onwards. In the 12 months through March, the CPI is up 2.6%, which was the largest gain since August 2018 and followed a 1.7% increase in February.
The jump mostly reflected the dropping of weak springs' last readings from the calculations. Those so-called base effects are expected to propel annual inflation up in the coming months before subsiding later this year. Stocks on Wall Street were mostly higher; the dollar slipped against a basket of currencies.
The U.S. Treasury prices rose slightly, Excluding volatile food and energy components, the CPI increased 0.3% in February after up 0.1% in February. The largest gain in seven months in the so-called Core CPI was driven by a rise in rents as well as hotel and motel prices which rebounded 4.4% in February after falling 2.7%.
The cost of healthcare rose 0.6% but prescription medications prices were unchanged, leading to total healthcare costs rising by 0.1%. The new cars and trucks prices increased a solid 0.5%, but the price used cars for a second straight month was unchanged. The production of automobiles has been hampered by a global shortage of semiconductors.
Consumers also paid more for car insurance as well as recreation and household furniture. However, apparel prices fell as did the costs related to education; the core CPI grew in February by 1.6% on a year-on-year basis after rising 1.3% in February.
The Fed tracks the core consumer spending expense price index for its 2% inflation target, a flexible average. The Core PCE Price Index is at 1.5%; the cost of services climbed 0.4% in February after increasing to 0.3%. The government reported last week that Producer prices in March climbed. With the CPI and PPI data in hand, economists at JPMorgan predicted that the core PCE price index was up in March to 0.4% after coming in February up by 0.1%.
That would lift the year-on-year increase to 1.9% from 1.4% in February. March's strong inflation readings are in sync with several business surveys showing an acceleration in cost pressures.
Manufacturers are grappling with acute shortages of finished materials, rising commodities prices and difficulties in transporting basic goods. Some economists argue the fractured supply chains, together with nearly$ 6 trillion in government relief since the COVID-19 Pandemic barreled through the United States in March 2020 could boost inflation for a sustained period. The Fed has also slashed its benchmark daily interest rate to near zero and is pumping money into the economy through monthly bond purchases.
These economists also point to the business surveys, which have indicated that customer inventories are at record lows and order books are full. A survey from the NFIB on Tuesday showed just over a third of small companies wanted to raise prices in March, noting that solid inventories and low sales will create more opportunities to raise prices. This suggests companies have strong pricing power that could help them to expand profit margins after several years of margin compression, which could maintain inflation for longer, said James Knightley, chief international economist at ING in New York. But labor market slack could make it harder for inflation to continue spiraling higher.
In February 2020, the employment remains 7.4 million below its peak in February.
The highly uncomfortably accommodative fiscal and monetary policies are also unlikely to keep inflation as high if history is a good predictor of the future.
Nor were record federal budget deficits and rapid money growth any correlation with inflation over the past 40 years, said David Berson, Chief Economist at Nationwide in Columbus, Ohio. Moreover, the factors that have acted to keep inflation in check in recent decades- decreased inflation expectations, increasing use of technology, production movements to low-cost areas all remain in place.