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US consumer inflation eased in March, with cheaper gas and lower food prices providing some relief to households that have struggled under the weight of nearly two years of rising prices.
The government said on Wednesday that consumer prices rose just 0.1 percent from February to March, down from 0.4 percent from January to February and the smallest increase since December.
Measured from the previous year, prices only rose five percent in March, down from February’s six percent year-over-year increase and the smallest rise in almost two years. Much of the decline is the result of lower prices for goods such as gas, used cars and furniture, which spiked a year ago after Russia’s invasion of Ukraine.
Excluding volatile food and energy costs, so-called core inflation remains high. Core prices rose 0.4 percent from February to March and 5.6 percent from a year earlier. The Fed and many private economists consider core prices a better measure of inflation.
Price increases in the economy’s services sector – from rent and restaurant meals to haircuts and car insurance – remain core inflation, at least for now. The trend is widely expected to lead the Fed to raise its benchmark interest rate for the 10th straight time when it meets in May.
High inflation can inhibit global growth
Fed officials have predicted that after an additional quarter-point hike next month – which would raise the benchmark rate to about 5.1 percent, the highest point in 16 years – they will pause hikes but keep rates on hold until 2023. Officials have cautioned that the same can raise rates even more if they consider it necessary to curb inflation.
When the Fed tightens credit with the goal of tightening the economy and inflation, it usually leads to higher rates on mortgages, auto loans, credit card debt and many business loans. The risk is that higher debt levels can slow down the economy to the point of causing a recession.
On Tuesday, the International Monetary Fund, a 190-nation lending organization, warned that persistently high inflation around the world – and the efforts of central banks, including the Fed, to combat it – will slow global growth this year and next.
Even so, there are signs that inflationary pressures will ease in the coming months. One reason why inflation may fall is that economists expect growth to slow in the United States later this year, in part because turmoil in the banking sector could cause banks to limit lending.
The Fed’s record rate hikes in years are also starting to take a toll on the hot labor market, with new data showing that companies are advertising fewer vacancies and wage growth is slowing from higher levels.
The biggest driver of core inflation is probably the cost of housing, including rent. They are growing at an annual pace of about nine percent, according to government figures.
Still, Daftar Apartemen, which tracks real changes in new rents, showed rents rose 2.6 percent in March compared to last year, the lowest level since April 2021. Inflation data should show mild increases in the coming months.
Wage growth has also slowed
The Fed is also laser-focused on service fees, which are rising at a rapid pace. Officials at the central bank said they believed rising wages, however good for workers, contributed to the price hike.
Last week’s March jobs report showed that wage growth slowed over the past year. Businesses are posting fewer open positions, and the number of Americans leaving their jobs to take new, usually higher-paying work — the driver of higher wages — is declining.
A more worrisome trend is the possibility that banks will pull back on loans to conserve funds, after two major banks collapsed last month, sparking turmoil in the United States and abroad. Many small banks have lost customer deposits to huge global banks that are considered too big to fail. The loss of those deposits may mean that banks will lend less to companies and individuals.
Some small businesses say they are having trouble getting loans, according to a survey by the National Federation for Independent Business. The IMF said on Tuesday that debt withdrawals could slow growth to almost half a percentage point over the next 12 months.
A slowdown in the economy can lose inflation and as a result will help the Fed to achieve its objectives. But the economic blow may be bigger than expected. In a worst-case scenario, it could mean a full-blown recession with the loss of millions of jobs.
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