This morning at 8:30 A.M. (EDT), we received another key report on the U.S. economy when the Department of Labor released data on consumer prices for the month of March. Specifically, the Consumer Price Index for all urban consumers increased 0.3% in March on a seasonally adjusted basis—the consensus expectation was for an advance of 0.2% last month.
The data was another rather tame reading on inflation. Excluding the volatile energy and food components, core consumer prices increased a modest 0.2% last month, after increasing 0.1% in February. Core prices rose 2.3% in the 12 months that ended in March, which is close to the Federal Reserve's inflation target of 2%. It also gives more credence to the lead bank’s current stance of holding interest rates steady for the foreseeable future. The tame inflationary environment also keeps the possibility of some additional bond buying (i.e., QE3) in play if further economic stimulus were to be required. However, the lead bank has shown no desire of late to go this route—especially with most recent economic data indicating that the U.S. economy is growing, albeit at a very measured pace right now.
Meanwhile, one thing that remains a big concern for the Federal Reserve is the rising costs of energy and food items. If these costs were to rise in the coming months, it could severely limit the consumer’s disposable income. Such a scenario would likely have an adverse effect on the services sector, which accounts for roughly two-thirds of the nation’s economic output. However, the latest report also showed that energy cost inflation moderated last month, with the energy index increasing only 0.9%, compared with a 3.2% jumped in February. Food prices also rose a rather mundane 0.2% in March.
All in all, the latest data on consumer prices were encouraging. This, combined with yesterday’s companion report showing that inflation pressures aren't increasing much at the wholesale level, is good news for both producers and consumers. It may also allow consumers to spend more on travel and accommodations during the upcoming peak vacation months, which would be good news for a domestic economy that is currently still only growing at a rather pedestrian pace. - William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.