US prices softer than expected in March
A sharp rise in energy costs is in no way surprising, given the ongoing disruption to oil and gas supply globally. But that aside, inflation measures underwhelmed market expectations, helping to assuage fears that a more broad-based increase in price pressures could result. With this in mind, the FO
The US March inflation report has been eagerly awaited by traders looking to gauge the impact of recent Middle East hostilities.
A sharp rise in energy costs is in no way surprising, given the ongoing disruption to oil and gas supply globally. But that aside, inflation measures underwhelmed market expectations, helping to assuage fears that a more broad-based increase in price pressures could result. With this in mind, the FOMC is now likely to re-focus its attention on labour market worries at their policy meeting later this month.
A rate cut is unlikely to be on the table just yet, but we think traders are underestimating just how quickly the Fed could turn to cutting rates if price growth continues to underwhelm.
Turning specifically to March figures, the CPI rose 0.9% relative to February, matching expectations. The primary contributor to this increase was, of course, energy costs. Energy prices overall rose 10.9% last month, with gasoline specifically up 21.2%. Even so, this was not quite sufficient to see annual price growth match consensus forecasts. Economists had predicted CPI growth would reach 3.4% in the year to March, up from 2.4% in February. The actual reading came in 0.1pp below this, with the report indicating all-items price growth of 3.3% YoY.
Removing erratic energy and food costs leaves the inflation picture looking much less dramatic. Core CPI rose just 0.2% MoM in March, and 2.6% YoY, below consensus expectations that had predicted increases of 0.3% and 2.7%, respectively. Interestingly, transportation services prices rose 0.61% MoM, well within the typical range of monthly prints.
This had been one of the components where we would have expected to see passthrough from higher energy costs, if these were translating into broader inflationary pressures.
Admittedly, this is just one month of data. Fed officials will want more evidence that price pressures remain contained before feeling comfortable cutting rates. Still, this is one in the win column for FOMC doves. Assuming the future passthrough remains limited, and the present ceasefire in the Gulf holds, we think that could open the door to a resumption in policy easing somewhat sooner than markets anticipate at present.
Looking at current market pricing, swaps imply just 8bps of easing cumulatively by year-end.
This, in our view, is hard to square with Fed messaging around labour market weakness, both before the recent outbreak of Middle East hostilities, and in the March FOMC meeting minutes released earlier in the week. With the March CPI data in hand, we now expect the Fed to re-focus on downside employment risks, albeit conditional on elevated energy prices pressure not broadening. But if correct, that points to a dovish FOMC surprise at the end of April and at least one rate cut before year-end, posing downside risks to the dollar as markets readjust rate expectations.