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Inflation Data Released: The Economy continues to disinflate

Updated: Apr 12, 2023

U.S. Bureau of Labor released the latest Consumer Price Index (CPI) report for March 2023. The data show that inflation is now at 5%. This is progress made. Indeed, the CPI for February shows that inflation was at 6% and this percentage now decreased by a full point. This decline does not mean that inflation is now in a good spot. 5% inflation is still a high rate. What this decline shows is that inflation is nosediving in the right direction. Certainly, since 2022, the Federal Reserve has consistently raised interest rates in order to tame inflation. From nearly 10% in late 2021, inflation dropped to 5% over one year due to an aggressive raise in interest rates and a tightened credit market.

Source: U.S. Bureau of Labor Statistics

The data show that the CPI for all items is at 5%. As was aforementioned, 5% remains a high percentage for inflation. Why is that? This is because the CPI for food and all items without food and energy remains high. Indeed, the CPI for food is at 8.5%, and the CPI for all items minus food and energy is at 5.6%. The major reason why inflation dropped in March was because of a decline in the rate of energy. CPI for energy dropped to -6.4%. In the energy sector, the rate of energy commodities is estimated at -3.5%. In September 2022, energy commodities were at -1.7%. Gasoline dropped from -4.2 in September 2022 to -4.6 in March 2023. Fuel dropped from -4.2% in September 2022 to -4.6% in March 2023. It is in the energy services that the major drops occurred. Electricity dropped from 0.8% in September 2022 to -0.7% in March 2023 and utility dropped from 2.2% in September 2022 to -7.1% in March 2023.

The released data had a positive impact on capital markets. U.S. stocks edged higher following the release of the data. Treasury yields moved to the upside, but then fell 7 basis points to around 3.36% at market open. Moreover, according to the data from the U.S. Bureau of Labor Statistics released last Friday, April 7; the U.S. economy added 236,000 jobs in March while the unemployment rate fell to 3.5%. Still, the slowdown likely won’t be enough for the Fed to pause its aggressive rate-hiking campaign. Following the release of Wednesday’s inflation data, markets were pricing in a roughly 70% chance the Federal Reserve raises rates by another 0.25% in May, according to data from the CME Group. Ryan Sweet, the Chief U.S. Economist at Oxford Economics, wrote:

“Though inflation has moderated, the March consumer price data keeps a 25bps rate hike by the Fed clearly on the table for May. However, the odds of a pause in June are raising[…] The Fed has made it clear that the decision to hike at the last meeting was a close one, but services inflation remains strong, and the labor market is tight, therefore, their work isn’t done.”

If inflation continues to decrease, as we expect to in the next CPI report for April, the Fed may potentially reconsider its position on rates in May. The likelihood that the Fed may pause interest rates is still meager even if inflation continues to disinflate. But there is a strong chance that the rates hike in May might be the last one that the Federal Reserve does for a while.


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