US consumer prices rise moderately in March; underlying inflation still hot

WASHINGTON (Reuters) – U.S. consumer prices barely rose in March as the cost of gasoline declined, but stubbornly high rents kept underlying inflation pressures simmering, likely ensuring that the Federal Reserve will raise interest rates again next month.

The Consumer Price Index (CPI) climbed 0.1% last month after advancing 0.4% in February, the Labor Department said on Wednesday. In the 12 months through March, the CPI increased 5.0%, the smallest year-on-year gain since May 2021. The CPI rose 6.0% on a year-on-year basis in February.

The annual CPI peaked at 9.1% in June, which was the biggest increase since November 1981, and is subsiding as last year‘s large rises drop out of the calculation. Inflation by all measures remains more than double the Fed’s 2% target.

Gasoline prices are likely to rebound in the months ahead after Saudi Arabia and other OPEC+ oil producers early this month announced further oil output cuts.

Economists polled by Reuters had forecast the CPI gaining 0.2% and advancing 5.2% year-on-year.

The inflation data came on the heels of last Fridays employment report, which showed a solid pace of job growth in March and the unemployment rate falling back to 3.5%.

Persistently high inflation, labor market tightness and signs that financial market stress, wrought by last months collapse of two regional banks, is easing should allow the Fed to continue prioritizing restoring price stability.

Financial markets are leaning toward the U.S. central bank increasing rates by another 25 basis points at the May 2-3 policy meeting, according to CME Groups FedWatch tool.

The Fed last month raised its benchmark overnight interest rate by a quarter of a percentage point, but indicated it was on the verge of pausing further rate increases in a nod to the financial market turmoil. It has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range.

Excluding the volatile food and energy components, the CPI increased 0.4% last month after rising 0.5% in February. Sticky rents continued to drive the so-called core CPI.

With independent measures showing rents on a downward trajectory, however, housing inflation is expected to start subsiding in the second half. The rent measures in the CPI tend to lag the independent gauges.

Nevertheless, the disinflation road is likely to be bumpy, with pressure coming from the cost of services away from housing. In the 12 months through March, the core CPI gained 5.6% after rising 5.5% in February. That ended five straight months of slow increases in the year-on-year core CPI.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)