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April 10, 2019 Blog 2 min read
In the tenth year of expansion, for a growing economy with a tight labor market, fairly stable measures of inflation around 2% are about as good as it gets.

March 2019 CPI Chart

The consumer price index (CPI) increased 0.4% in March from the month prior, in line with the consensus forecast of economists. Excluding food and energy, core CPI edged up by a mere 0.1%, also consistent with expectations.

The trailing twelve-month CPI reflected a 1.9% increase in prices, edging higher after four consecutive monthly declines. The core index moved in the opposite direction, easing to 2.0% - its lowest point in over a year.

More than anything else, the surge in March reflected a pickup in energy costs on the back of a 6.2 increase in gasoline prices. Food prices also increased by 0.3%.

As has been the case for some time, shelter costs continue to increase at a brisk rate – up another 0.4% in March and 3.4% over the past year. That factor alone represents a third of the index, making it a significant contributor to the headline inflation rate.

Against the backdrop of an economy in its tenth year of expansion that is still growing at a solid pace and relatively tight labor market conditions, relatively stable measures of inflation around the 2% level are about as good as it gets.

The U.S. labor market has remained tight as unemployment fell slightly below 4.0% and wage growth rose to 3.2% growth on a year-over-year basis in March, while real (inflation-adjusted) hourly earnings grew by just 1.3% over that period. Still, the pace of wage gains remains below prior cyclical peaks, and improving productivity may help to mute the flow through impact on inflation.

The lack of any apparent sustained pressure pushing inflation meaningfully beyond current levels has been critical to the Fed’s ability to step back from its previously prescribed path for interest rates. Despite sub-4.0% unemployment, inflation itself has remained well contained, as have inflation expectations.

It’s good news for an economy that appears to be positioned for continued growth, despite being at the doorstep of ten years in just a few short months – a milestone that would make it the longest expansion in U.S. history.

The Fed now appears both content and justifiably able to revert to a less aggressive stance to monetary policy than was being forecast a year ago. Not that long ago, the Fed was calling for 3-4 rate hikes in 2019. Today, the market is pricing in a higher probability that the Fed will need to cut before the end of the year, with virtually no chance of an increase.

Whether or not that comes to pass remains to be seen, but at least for now, the combination of moderate inflation and decelerating growth provide the Fed with sufficient cover to stand pat for the foreseeable future.

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