The annual rate of inflation in the US, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), stood at 5.0% in March. This is according to data released by the Bureau of Labor Statistics this afternoon. Inflation on the CPI-U measure has now slowed for nine consecutive months since June’s peak of 9.1%. March’s month-on-month slowdown was the largest of that sequence, with inflation being 1.0 percentage point lower than in February. March’s reading also came in slightly lower than consensus expectations of 5.2%. 

The recent slowdown in the rate of inflation in the US has largely been driven by energy. Falling wholesale prices have been key, reducing the upward pressure on inflation from household bills. Indeed, energy’s contribution to March’s inflation rate was negative, with prices being down by 6.4% on the year. This reflects a base effect, given that energy prices began to escalate this time a year ago, as a consequence of Russia’s invasion of Ukraine. Within the energy category, particularly stark annual deflation was seen for motor fuels, for which prices fell by 17.4% on the year. Some energy subcategories continue to see annual price growth, however. For instance, electricity prices were up by 10.2% on the year in March, more than twice the headline rate of inflation.

Away from energy, price growth remains stubborn. Essential consumption categories such as food and shelter saw price growth exceed the headline rate once more in March, at 8.5% and 8.2%, respectively. Meanwhile, core inflation, which excludes more volatile consumption categories, accelerated in March, reaching 5.6%. Though only slightly up on February’s rate of 5.5%, this put an end to five consecutive months of slowdown. This also marks the first month since December 2021 that the core CPI-U rate has exceeded the headline rate.

Stubborn core inflation likely provides the Federal Reserve (Fed) with further headroom to raise rates once more. At its upcoming meeting, Cebr expects the Fed to implement another 25 basis point rate hike, which would take the funds rate range to 5.00%-5.25%. At that point, we expect the Fed to halt its course of monetary tightening. Recent developments in the financial system, notably the collapse of Silicon Valley Bank and the takeover of Credit Suisse, have impacted the expected path for interest rates, given that further rate hikes could bring additional volatility. Meanwhile, the Fed also faces a trade-off from the perspective of output, with higher interest rates contributing to the weaker growth outlook for the US. Cebr currently expects the US economy to grow by just 0.6% in 2023, which would mark the weakest growth performance since 2008, excluding years in which the economy contracted. We expect the Fed to attach greater weight to the goals of maintaining financial stability and supporting the health of the wider economy in its upcoming decision-making, post its Federal Open Market Committee meeting in May.

Sam Miley is a Senior Economist at Cebr