Inflation was expected to turn higher in the spring because of base effects. Big price drops in the early months of the pandemic are now dropping out of the annual comparison. Nevertheless, the m/m change in the US core CPI showed a notable increase in March. Excluding food & energy, the CPI rose 0.34% m/m. With shelter stripped out too, the core CPI was up 0.37% m/m. The annual increases accelerated to 1.65% and 1.61% respectively.
There are much bigger base effects due next month, and for the May report. Getting a gauge on the underlying rate of inflation is less than straightforward: the big m/m rise in the core CPI for the June to August period last year (+1.13%, an average of 0.38% m/m per month) will also drop out of the annual comparison. It may not be possible to tell exactly where the core inflation has ‘settled’ post-pandemic until the August report has been released.
Doves may be reassured that the ‘large’ increase in the core CPI for March, was no higher than the average recorded for June to August last year. And the Fed is not going to be swayed from its accommodating stance by one report.
The biggest risk for markets remains the Biden’s profligate fiscal policies, and the torrent of Treasury issuance.
Summary
- Core CPI jumps
- Bonds do not react, for now
- Throwing oil on fire, and fiscal stimulus
