• Topline Consumer Price Index (CPI) rose by 0.1% in March 2023, up 5.0% year-over-year
• Core CPI, less Food & Energy, was steady at 0.4% in March 2023
• Energy CPI dropped 3.5% in March 2023, including a fall in Gasoline prices of 4.6% for the month
• Shelter and Food & Beverage price growth eased in March 2023, rising 0.3% and 0.0%, respectively

The topline Consumer Price Index (CPI) continued its trend of easing in March 2023. Year-over-year inflation for All Consumer Items was 5.0% in March, which was down from a 6.0% result in February. Energy prices declined sharply in March 2023, down 6.4% from one year ago. The March 2023 result, however, coincides with the year-ago impact of Russia’s invasion of Ukraine which spiked energy prices in March 2022. But Energy prices were also down versus February 2023 – despite OPEC’s surprise announcement of production cuts and the gain in oil prices that has resulted. Energy prices were down 3.5% versus February 2023 alone. Higher oil prices should incite caution regarding the potential for inflation volatility over the next few months. Other consumer necessities such as the CPI report’s Shelter and Food & Beverages components also eased in March 2023, suggesting some breathing room for consumers may be developing on the inflation front.

At +0.4% for March 2023 versus the month prior, Core CPI – which excludes volatile Food and Energy prices, and which the Federal Reserve eyes most closely when setting monetary policy – saw a fourth consecutive month at the same stable pace of gains. The March 2023 Core CPI result translates to a 4.7% annualized growth pace, which is down from February’s 5.6% annualized pace. Annualized growth will be of particular importance versus the year-over-year calculation over the coming months given “base effects” of last year’s exceptional acceleration in inflation from March 2022 through June 2022. Gauging in what direction and at what pace inflation is trending in the here and now will be better measured by month-over-month trends, removing the influence of outsized growth last year. An annualized pace of inflation that continues to trend toward the Fed’s 2% average goal will be an indication that monetary policy tightening efforts can at least pause by mid-year.

Supporting the notion that inflation remains on the right track – that is, a slow decent toward the Fed’s 2% average target – is that prices for consumer necessities continued to trend downward in March 2023. The Housing component of the CPI index grew at 0.3% for the month, which translates to a 3.6% annualized pace. This is the slowest monthly gain for CPI’s Housing component since Aug, 2021, and is down from a +0.8% peak seen in August 2022 and again in January 2023. This component of the CPI measure is the largest influence on prices by weight, accounting for over 40% of the total index. Homebuying collapsed in 2022, with existing home sales falling to a sales pace not seen since 2011, and the cost of maintaining a household finally seems to be catching up with the overall housing market’s reversal. Fewer homebuyers has taken time to cap demand, and therefore price pressure, on household necessities.

Prices for Food & Beverages joined Energy and Housing CPI components in their slowdown in March 2023, posting no significant increase versus February (+0.02%). Like Housing, the Food & Beverages category posted its weakest gain in some time. Food & Beverage prices have not been flat or better since July 2020, when the U.S. economy was still trying to establish its bearings after pandemic-induced shutdowns, travel restrictions, and fear of leaving home for even the most basic everyday needs. Food & Beverage prices had risen as rapidly as 1.1% through mid-2022, again reinforcing the importance of the annualized pace of gain in the coming months as an indicator of price pressures’ direction in the coming months.

Inflation has fallen to below the pace of wage growth over the past two months (February and March 2023). The Federal Reserve’s inflation-fighting messaging, therefore, will likely begin to focus on consumer activity. If consumers continue to spend in response to income growth and slower price gains, the Fed’s job of taming inflation will drag out longer – perhaps not at the exceptional pace of gains seen in mid-2022, but longer than would be the case if the Fed were able to induce the “Demand Destruction” across the economy that has resulted in the housing market over the past year. Dwindling savings among households and rising high-interest consumer debt may help the Fed reach its consumer slowdown goals, but unfortunately, these same influences are the most likely to push the economy into recession in the second half of this year as the U.S. consumer breaches its spending limits. The battle against consumer price inflation is moving in the right direction but is not yet over. And the longer that it goes on, the more difficult it will be to avoid recession as the end result.

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