The Labor Department reported that inflation accelerated in March with the headline figure reaching 8.5% which was slightly above expectations of 8.4%. This is the fastest gain since 1981, but it wasn't entirely surprising given what's transpired in terms of food and energy prices since Russia's invasion of Ukraine.
Surprisingly, stocks had a huge initial rally on the figure as internal components of the report were encouraging in terms of some of the more extreme areas like used cars peaking. Further, there is continued improvement in terms of transportation bottlenecks and supply chain improvements at least in the U.S. However, there continues to be some uncertainty about the eventual impact of China's strict lockdowns in terms of leading to another round of bottlenecks and backups. So, these concerns are possibly why stocks weakened the rest of the day to close red.
Core CPI came in at 6.5% which was in-line with expectations, however monthly core came in at 0.3% which was below expectations of 0.5%. This brings about the possibility that some of the inflationary pressures are likely to ebb on their own. Most of the inflation gains were driven by food and energy which is still worrisome but less than a sticky, entrenched inflation cycle which could truly cause the Fed to push the economy into a recession.
But, the higher inflation still means that worker's wages are negative on a real average basis despite being up 5.6% compared to last year. Wage gains are expected to hover around 6% in March . Another concern is that rents continue rising at a rapid rate , and this trend seems unlikely to abate given demographics and low supply.
Food prices rose 1% on a monthly basis and 8.8% on an annual basis. Energy prices were up 11% and 32% with gasoline prices higher by 18.3%. Used car and truck prices dropped 3.8% on a monthly basis, although they are still up 35.3% on the year.
Despite the many challenges and headwinds that are still present, the report was a reminder that some relief is coming which should push core CPI lower. In turn, this would allow the Fed to slowplay its rate hikes rather than being forced to act. This might lead to increased confidence that the Fed will be able to navigate its dilemma and slow inflation without hurting the economy.