US consumer prices edge higher than forecast in March

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US consumer prices rose by the most in nearly nine years in March, spurred by pent-up demand and rising petrol prices as the economy continued to recover from coronavirus-driven lockdowns.

The consumer price index rose a seasonally adjusted 0.6 per cent last month compared with February, the labour department said on Tuesday — the quickest pace since August 2012.

That topped economists’ average forecast of a 0.5 per cent gain, according to a Reuters poll. It was fuelled in part by a jump in the petrol index, which surged 9.1 per cent and accounted for nearly half the increase.

For the year, headline inflation rose 2.6 per cent — ahead of expectations for a 2.5 per cent increase.

Inflation could rise to 3.5 per cent on an annualised basis in coming months, said Kathy Bostjancic, chief US financial economist at Oxford Economics. However, she added that this “will not represent the start of an upward inflationary spiral”.

So-called core CPI — an underlying measure of inflation which strips out volatile food and energy prices — registered a monthly gain of 0.3 per cent, driven by higher rents and auto insurance and partly offset by lower clothing prices. Core CPI rose 1.6 per cent from a year ago, ahead of estimates.

The annual figures in Tuesday’s report, in particular, received a boost from so-called base effects — prices started to crumble this time last year as the US began lockdowns to curb the coronavirus pandemic.

A ramp-up in vaccination rates and an easing of lockdown restrictions, alongside President Joe Biden’s $1.9tn fiscal stimulus package, are expected to unleash pent-up demand and temporarily lift inflation. Supply chain disruptions are already contributing to higher input costs at American companies and prompting some to raise prices for household items.

The Federal Reserve at its March meeting revised sharply higher its inflation and growth forecast. However, the central bank has thus far shrugged off fears of a rapidly overheating economy and expects any jump in inflation to be temporary.

Investors are watching to see if the increase in prices is transitory as they try to determine how long the Fed can continue to provide ultra-accommodative monetary support, including asset purchases of $120bn per month and interest rates near zero. The Fed has signalled it does not expect to lift rates until 2024.

After years of sluggish inflation the Fed will tolerate a temporary rise in inflation, said Ian Shepherdson, economist at Pantheon Macroeconomics.

“Officials will call the increase in inflation ‘transitory’ and will push back hard against the idea that any sort of policy response is needed. That idea will hold for a while, but if the increase in inflation persists, and — especially — if it is accompanied by faster wage growth, then the Fed’s line will become untenable,” he added.

The yield on the US 10-year Treasury, a key gauge of borrowing costs, slid to 1.66 per cent, having been at 1.68 per cent before the data release. The S&P 500 was flat.

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