Consumer Price Index: Inflation Hits 2-Year Low But Higher Prices & More Rate Hikes Are Coming, According to Experts
Consumer inflation continued a somewhat accelerated downward trend in March, largely thanks to falling gas prices, but whether this will be sufficient for the Federal Reserve to be confident enough to ease its pace of hikes remains unclear.
The Consumer Price Index (CPI) decreased to 5%, the Bureau of Labor Statistics (BLS) reported on April 12, with the most increases in shelter prices. This is down from 6% in February.
“Though broadly slower, this month’s inflation growth was partially led by increases in shelter prices, which will continue to take more money out of the pockets of renters and new home buyers,” said Ben Vaske, investment strategist at Orion Advisor Solutions.
According to Vaske, the Fed may have justification for a pause in the rate hiking cycle when considering slower CPI growth and a cooling labor market, though the broad market is still pricing another 25-basis point hike at this time.
However, while this was the smallest 12-month increase since the period ending May 2021, the figure also represents a 0.1% increase for the month. In addition, core CPI, which excludes food and energy, rose 5.6%, a 0.4% increase for the month.
This data was in line with estimates, as economists surveyed by The Wall Street Journal expected inflation to increase at a 5.1% annual pace, and expected core prices to increase 5.6% during the same period.
What Will the Fed’s Response Be?
Despite the drop, inflation levels are still a far cry from the Federal Reserve’s target of 2% inflation. And now, the question remains whether the latest CPI data might give the Federal Reserve reason enough to ease its pace of rate hikes or raise interest rates in May for a tenth consecutive time. The increase in rates has been affecting consumers’ wallets for months, as it translates into higher borrowing costs, making everything from mortgage loans and credit cards.
On March 22, in one of the closest-watched Federal Reserve Board’s Federal Open Market Committee (FOMC) meetings, the Fed announced that it would increase interest rates by a quarter point. With this ninth rate increase since March 2022, the Fed was tasked with the tricky balancing act between taming inflation and stabilizing a very turbulent banking sector — as the meeting was on the heels of Silicon Valley Bank and Signature Bank collapses.
There are some signs that the economy is cooling down, such as the fact that banks will tighten lending due to the regional banks’ turmoil, which in turn will slow down economic growth. But whether this will be enough to sway the Fed, which is set to make its next rate decision on May 3, have experts split.
“We have made progress on inflation and that should come as no surprise given the rapid Fed fund increases over the last year,” said Kevin Rendino, CEO of 180 Degree Capital, adding that the SVB collapse should continue to help tame inflation as it has sparked significant fear in the economy. Rendino added that while the Fed has been addressing runaway inflation in the past months, it now also has to address recessionary fears.
“We are at a crossroads where overreaching on rates could truly cause more Silicon Valley Bank-like scenarios,” he said, adding that the report gives the Fed “some breathing room” and his views are 50-50 on a 25 basis points increase at the next Fed meeting.
The sentiment was echoed by several experts who said that while the CPI report shows inflation continuing to come down, it still has a long way to go before it hits the Fed’s desired target.
“We can take some solace that inflation is slowing meaningfully — even a little bit more than economists and investors expected. There’s a good chance that the Fed will raise rates at least one more time in May. The expected quarter-point increase would bring the cumulative toll to five percentage points since March 2022,” said Ted Rossman, senior industry analyst at Creditcards.com.
Indexes: The Ups and Downs
Shelter costs — one of the largest expenses for most households — continue to be a key driver of overall inflation, as are groceries, said Rossman.
“In short, we’re continuing to move in the right direction, but the average consumer is still not noticing much relief in several important areas,” added Rossman.
The energy index fell 3.5 % in March after decreasing 0.6% in February — a 6.4% annual decrease. In addition, the gasoline index also decreased 4.6% for the month, a whopping 17.4% drop on an annual basis.
The food index remained unchanged for the month, while the food at home index finally fell 0.3% — the first decline since September 20202.
The price of eggs — which became symbolic of the inflationary pressures — also registered a significant decrease, falling 10.9% for the month.
The shelter increased 0.6% for the month. This was an 8.2% increase on an annual basis, accounting for more than 60% of the total core CPI increase.
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“The impact on Americans’ wallets is real and can tempt investors to make hasty adjustments to their portfolios, but financial plans should be built for and adjusted around an individual’s long-term goals, time horizon, and risk tolerance–not economic headlines,” said Tiana Patillo, Financial Advisor at Vanguard. “Diversified portfolios are built to withstand different inflationary and market environments.”
Patillo said that investors feeling uneasy about how their portfolios will hold up should reflect on their long-term goals, time horizon and risk tolerance.
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