Inflation Cools in March as Fed’s Interest Rate Increases Take Effect: Labor Department Report

The latest report from the Labor Department shows that inflation in the U.S. economy cooled in March, indicating that the Federal Reserve’s interest rate increases are beginning to have a positive impact.

The consumer price index, which is a widely followed measure of the cost of goods and services in the country, rose 0.1% for the month, falling short of Dow Jones’ estimated 0.2%. The index also rose 5% from a year ago, lower than the estimated 5.1%.

Although inflation remains above the Fed’s target level of 2%, the data indicates that it is showing signs of decelerating. This is a positive sign for policymakers, who have been grappling with rising inflation rates in recent months.

The report showed that energy costs dropped by 3.5%, while food costs remained unchanged, both contributing to the lower-than-expected inflation rate.

Excluding food and energy, the core CPI rose 0.4% and 5.6% annually, in line with expectations. The report also showed that used vehicle prices, which had previously contributed to the inflation surge earlier in the year, declined by 0.9% in March and are now down 11.2% year over year.

Shelter costs, which account for a third of the weighting in the CPI, rose by 0.6%, the smallest gain since November. However, it still resulted in prices rising by 8.2% annually, closely watched by Fed officials.

The report is likely to be well received by investors as stock market futures rose sharply, while Treasury yields fell.

The markets were still pricing in a 65% chance of a final 0.25 percentage point interest rate increase at the Fed’s May meeting, although this was slightly lower than Tuesday, according to the CME Group.

The Fed has raised its benchmark interest rate nine times over the past year, for a total of 4.75 percentage points, in an effort to control inflation. The bank initially dismissed the inflation surge as transitory, but as it persisted, the Fed was forced to raise interest rates more quickly.

The labor market has also been a key target for the central bank, as a shortage of workers had previously contributed to rising wages and prices. However, in March, nonfarm payrolls increased by 236,000, the smallest gain since December 2020, and average hourly earnings rose at a 4.2% annual pace, the lowest level since June 2021.

The Fed is hoping to balance its policy to prevent a recession while engineering a slowdown in the labor market. Gross domestic product growth is tracking at a 2.2% annualized pace for the first quarter, according to Atlanta Fed data, although many economists predict a contraction later in the year.