The March Consumer Price Index (CPI) report was released this morning to a (figurative) standing ovation. The inflation report impressed investors and economists alike, sparking hope the central bank may suspend its rate hike. Indeed, the make-or-break March CPI report surpassed most consensus projections, showing a notable slowdown in price growth.
Prices rose 0.1% from February to March, representing a 5% annual increase, the slowest growth rate since June 2021. This is a small but notable improvement from estimates of a 0.2% monthly and a 5.1% yearly increase.
Categories like energy and food were the major components of today’s drop. Energy costs fell 3.5% from February, while food at home fell 0.3%, the first drop in the category since September 2020. Eggs, in particular, have been the subject of record-breaking inflation, fell almost 11% in price last month. However, they’re still up nearly 36% over the past year (a particularly vicious bird flu is primarily to blame).
Markets Are (Mostly) Pleased
There are some caveats, however. Food and energy are notoriously volatile components. Indeed, you could write off today’s 5% annual inflation achievement as a rebuke of Russia’s invasion of Ukraine last year and the massive spike in energy prices that followed.
In fact, core inflation, which ignores food and energy, actually accelerated to 0.4% monthly and 5.6% annually, the highest level since May 2021, though that’s still in line with expectations.
The markets, however, are seemingly pleased with the news. Most major indices are enjoying small gains heading into the afternoon.
“As the economy slows, consumer prices will decelerate further and should bring inflation closer to the Fed’s long-run target of 2%,” said Jeffrey Roach, Chief U.S. Economist at LPL Financial. “Markets will likely react favorably to this report as investors gain more confidence that the next Fed meeting may be the last meeting when the Committee raises the fed funds target rate.”
March CPI Impresses Investors Rumors of a May Rate Hike Pause
As with most economic data releases, the Federal Reserve plays an essential role in the story. Indeed, today’s report only reinforces narratives that the central bank may opt to slow down its rate hike as the economy appears to be finally digesting its nine previous interest rate increases this cycle.
The Fed has raised the federal funds rate to 4.75%-5% over the past year or so, the quickest pace of monetary tightening since the 1980s. While metrics like jobs and consumer spending have been stubbornly strong (at least until recently), fueling speculation that the Fed will continue its monetary tightening, reports like today’s should calm the mob down for the moment.
The central bank has long maintained its 2% inflation goal and the lengths it is willing to go to achieve its target. It’s a dangerous game, however, as every bit of added rate pressure only increases the likelihood the country enters a recession, which many economists project is a nigh-certainty at some point in the next year.
A Win for the Economy and Stocks
According to Neil Dutta, Head of Economics at Renaissance Macro Research, however, today’s report is in many ways a win for the country’s path forward:
“If I think about the economic outlook as four potential scenarios: (1) soft-landing, (2) recession, (3) continued overheating, (4) stagflation – the odds of stagflation went down while the odds of soft-landing went up. Good news for stocks.”
Heading into next month’s Federal Open Market Committee Meeting (FOMC), all eyes are once again on the Fed. Before today’s report, short-term interest rate futures priced in a roughly 80% chance of a 25 basis-point rate hike in May. Currently, it seems that has dropped to a 68% probability.
Whether today’s report is enough to convince the central bank to pump the breaks or continue hitting the gas remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
