The acceleration in U.S. core Consumer Price Index (CPI) inflation in March was in line with expectations, and likely a welcome development for Federal Reserve officials after a surprising string of soft inflation prints last year. The 0.3 percentage-point increase brought core CPI to 2.1% year-over-year as a large drop in wireless services prices last March finally fell out of the calculation, and we expect the pace to pick up further over the next few months (to 2.3%–2.4%) before settling back to 2.2% by year-end.

Digging into the details of the March print, we think two trends bear watching:

  • First, the firming in medical services inflation we’ve been expecting has started to materialize, which should support inflation over the next year.
  • Second, despite the recent U.S. dollar depreciation, core goods remain on the mild deflationary path we’ve seen for the better part of the last several years. However, we continue to forecast some firming in core goods prices this year despite firms’ more muted pass-through of rising input costs.

Policy changes support pickup in medical services inflation

We expect the pace of medical services inflation to rebound to around 3.0% in 2018 after moderating to 2.0% year-over-year in 2017. One supporting factor is a Trump administration policy change that increased outpatient Medicare reimbursement rates by 4.4% in January 2018. Although the CPI does not directly capture the prices of hospital services paid by government-administered health insurance programs, the higher Medicare payout rates will likely spill over into private insurance markets and boost CPI over the next several months. Indeed, hospital services inflation printed at 0.6% month-over-month in March, with help from a 0.7% increase in outpatient hospital services prices.