Data Underpinning CPI Report Suggest U.S. Inflation Moderated Materially in March

Although core U.S. inflation rose 0.4% in March, details in the Consumer Price Index (CPI) report suggest that the level of underlying inflation is moderating materially. Notably, rental inflation decelerated and there were no signs that increased wholesale prices for used vehicles were being passed on to consumers.

Overall, the March CPI report reaffirms our view that the U.S. Federal Reserve is close to the end of its rate hiking cycle, and whether it hikes one more time at its May meeting is a close call. Recent comments from Fed officials, particularly from Chicago Fed President Austan Goolsbee, raised the prospect that the central bank holds steady in May. Supporting this view: slowing loan growth, likely due in part to banking sector stress, and several other indicators that suggest that the U.S. economy is decelerating. If Fed officials want to pause, the March CPI print as well as the likely-to-be-weak retail sales report (coming on Friday) could give them room to do so.

Key details in the inflation report: rent, cars, groceries

The main news from the March inflation report is that rents and owners’ equivalent rents (OER) both decelerated to 0.5% month-over-month (m/m, down from 0.76% and 0.7% m/m, respectively). This timing aligns with the typical lag between the high-frequency rental data, which peaked last year, and the pass-through to CPI. Still, we believe this is an important indicator that the disinflation Fed officials have been counting on is likely to continue. Fed officials have been focusing on inflation for services excluding shelter under the assumption that rental inflation would moderate, and the March report should give them some comfort that this is likely to happen.