US Core Inflation Slows Only a Bit, Keeping Fed on Track to Hike

A key measure of US inflation showed hints of moderating in March, but likely not by enough to dissuade the Federal Reserve from raising interest rates again next month.

The core consumer price index — which excludes food and energy and is closely watched by the Fed — rose 0.4% from the prior month following a 0.5% gain, in line with economists’ estimates. Yet key measures of housing costs posted the smallest monthly increases in about a year and grocery prices dropped, the report from the Bureau of Labor Statistics showed.

Investors initially reacted positively to the report before a rally in stocks and Treasuries cooled. Traders still largely bet on a 25 basis-point rate hike at the Fed’s May meeting while maintaining wagers the central bank will cut later this year.

Inflation, however, remains too high. The core CPI, which economists view as the better indicator of underlying inflation, was up 5.6% from a year ago. It’s the first time in over two years that the core came in above the overall measure, which was up 5%.

That’s a sharp slowdown from the previous month because the figure is now compared with March 2022, when energy prices spiked immediately after Russia’s invasion of Ukraine.

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The report offers glimpses of disinflation ahead even while highlighting the sticky nature of inflation — particularly within the service sector. While policymakers are closely watching for any sign that the latest banking turmoil is weighing on the economy, brisk consumer price gains paired with a still-strong labor market are likely to lead the Fed to raise interest rates at least once more before what they say will be an extended pause.