Up 8.6% Year-Over-Year

• Consumer Prices (CPI) were up 8.6 percent in March 2022 in year-over-year terms, continuing to post 40-year highs
• Core CPI, excluding fuel and energy prices, was up 6.4 percent year-over-year for March 2022 – up only marginally from February 2022 results
• Month-over-month CPI gains for Housing, Transportation and Medical Care in March 2022 all accelerated versus February 2022
• CPI inflation for Apparel, Recreation and Education eased in March 2022 versus February 2022, with Food & Beverages price gains relatively flat for the month.

The Consumer Price Index (CPI) continued to post 40-year highs in March 2022, up 8.6 percent year-over-year. This result topped median estimates of 8.4 percent. Topline CPI again rose at the fastest pace since 1982’s descent from hyperinflationary highs, with the all-time peak then having reached 14.6 percent (April 1980). Price growth for the month, versus February 2022, came in at 1.2 percent, which represents the strongest result in month-over-month terms since 2005 (1.4 percent, September 2005). The acceleration in price growth for the month was concentrated in a few categories of consumer necessities, including Housing, Transportation, and Medical Care. Core CPI, which excludes the volatile – though still consumer-critical – categories of food and energy, was also up 6.4 percent year-over-year. This is only 2 basis points higher than the year-over-year inflation pace for Core prices seen in February 2022, highlighting this month’s impact of higher energy costs resulting from Russia’s invasion of Ukraine.

Core CPI’s modest acceleration in March 2022 tells a significant story within the overall inflation narrative this month. Removing the month’s 32 percent year-over-year (11 percent month-over-month) increase in the Energy CPI sub-index reveals the slowest month-on-month acceleration in overall prices since August 2021, which was actually a modest retreat in the pace of price inflation. Note that Food & Beverages prices also increased significantly in March 2022 at a pace of 8.5 percent year-over-year. But month-over-month price growth in Food & Beverages was down slightly versus February 2022 (0.96 percent vs. 1.00 percent), placing the onus of inflationary pressure for the month squarely upon the Energy component’s shoulders. Oil prices have fallen sharply since the early-March 2022 gains seen in the immediate wake of Russia’s invasion of Ukraine. Looking ahead, consumer prices have the potential to reach a plateau over the next few months in the absence of energy prices resuming the highs induced by the conflict in Ukraine thus far.

Consumer prices for Housing were up by 6.4 percent year-over-year in March 2022. This translates to a 0.7 percent gain versus February 2022 and is the strongest pace seen since Housing CPI growth joined the upward trend in consumer prices in earnest in late 2021. Monthly Housing CPI growth topped this pace only once during the housing bubble’s buildup of the mid-2000s. Housing CPI has now accelerated in year-over-year terms for 13 consecutive months through March 2022. As the largest component index of Topline CPI, momentum in housing costs promises to keep overall consumer price trends well above comfortable levels, especially given the Federal Reserve’s increasingly aggressive stance toward raising interest rates – and, thus, mortgage rates – and shrinking their balance sheet which will also raise long-term borrowing costs as a result.

Food & Beverages price growth accelerated was up by 8.5 percent in March 2022 in year-over-year terms. Again, at a pace not seen since the early 1980s (8.6 percent, June 1981), the cost of essentials for U.S. households remains a significant concern for the overall health of the economy. As more of consumers’ budgets are forced toward paying for necessities, fewer dollars are available for spending on economy-growing, job-creating endeavors. Unlike Energy prices, which have absorbed the harshest impacts of the conflict in Ukraine in this month’s CPI release, Food prices will continue to push higher given Ukraine and Russia’s combined contribution to global wheat exports, which is near 30 percent. Supply chain issues in the U.S. also remains an issue that will keep Food & Beverages price gains from settling toward a normal pace anytime soon.

In order to fight inflationary pressures, PNC now forecast that the Federal Reserve will raise its monetary policy rate by 175 basis points further from the 25 to 50 basis points range installed at the March 2022 meeting. This includes the expectation of two 50 basis point hikes in May and July. Even if the worst effects of energy prices are passed, there is enough price growth in key household categories and consumer spending momentum to force the Federal Reserve’s response to inflation to remain on track throughout the second half of 2022.

PNC is forecasting the pace of inflation to fall to 4.3 percent year-over-year by December 2022 as higher prices and rising borrowing costs temper consumer and business spending. This result would be positive in terms of avoiding an outright recession, as the U.S. economy should be able to endure the monetary policy tightening built into our forecasts in order to achieve this result. Risks of higher-than-predicted inflation, however, translate directly into a higher risk of recession as the Federal Reserve would be forced to respond even more aggressively to price growth across the economy.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.