Beneath the Skin of CPI Inflation, March: Inflation Behaves Very Badly, Saga Far from Over

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Ugly inflation in services drives up the 3-month “core CPI” for 7th month, to 4.5% annualized, worst in a year, and the 3-month overall CPI to worst since Nov 2022.

So inflation behaved very badly again in March. January was terrible, but it was kind of written off as maybe one of those January blips. February was bad, and so the January-blip story began to fall apart. And the Consumer Price Index for March, released by the Bureau of Labor Statistics today, was just as bad as in February.

It was driven by ugly inflation in “core services” which dominate consumer spending – even as prices of durable goods continued to decline, and as food prices remained relatively stable at very high levels. That energy prices started rising again, after their vertiginous plunge, didn’t help either.

“Core services” CPI jumped by 5.6% annualized in March from February. On a three-month basis, core service CPI jumped by 6.8% annualized, the worst since February 2023. We here have been disconcerted since late last year about inflation in core services. After cooling a lot into mid-2023, it has been reheating. And we started suspecting that the cooling had been one of the head-fakes that inflation is infamous for.

Core CPI, which excludes food and energy, rose by 4.4% annualized in March from February, same increase as in February.

The three-month core CPI rose by 4.5%, the worst increase since May 2023. The drop in prices of durable goods (dominated by motor vehicles) still softened the impact of hot services inflation, but not enough. Inflation in services is just behaving really badly.

The Fed has been in desperate search of “confidence” that inflation would continue to cool after the Amazing Cooling through mid-2023. But that search has gotten tangled up in a nasty turnaround. The cooling process had ended in August. It was hard to see in the fall of 2023. But over the past five months, it has become clear: Inflation, thought to have been vanquished, has raised its ugly head again.

The overall CPI rose by 4.6% annualized in March from February (blue in the chart). The three-month reading, which irons out some of the month-to-month squiggles, also rose by 4.6% annualized, the worst increase since November 2022, and the third month of acceleration in a row (red)…..


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