Consumer prices are rising more than expected

Consumer prices skyrocketed in March, thanks to both a strong economic recovery and year-over-year comparisons to a time when the Covid-19 pandemic was poised to choke the US economy, the Labor Department reported Tuesday.

The consumer price index rose 0.6% from the previous month but 2.6% from the same period a year ago. The year-on-year profit is the highest since August 2018, well above the 1.7% recorded in February.

Dow Jones estimates the index is expected to rise 0.5% on a monthly basis and 2.5% from March 2020.

Gasoline prices were the largest contributor to the monthly increase, at 9.1% in March and responsible for about half of the total CPI increase. Gasoline is up 22.5% year-on-year, part of a 13.2% rise in energy prices. Food also bumped higher, at 0.1% for the month and 3.5% for the year.

Markets reacted modestly to the news, with stock futures hitting trough before the morning but still pointing to a negative opening. Government bond yields remained broadly stable.

That big year-over-year increase was due to what economists call the “base effect,” or the lower level used for comparison. In March 2020, the government had just begun a massive shutdown of US companies, which would eventually send more than 22 million Americans to the unemployment line.

Core CPI, excluding volatile food and energy costs, increased 0.3% monthly and 1.6% year-over-year.

While inflation figures seem high, many economists and policy makers at the Federal Reserve expect the rise to be temporary. April is also likely to see a sharp rise, but then the numbers should decline as the worst months of the shutdown drop out of the data comparisons.

Fed officials have said they will not adjust policy based on short-term jumps in inflation data. Chairman Jerome Powell told CBS “60 Minutes” in an interview on Sunday evening that he does not expect rate hikes this year.

Still, markets have priced in higher growth and inflation, with government bond yields rising to their highest levels since before the pandemic. The economic reopening coupled with an unprecedented level of government policy support is contributing to the inflationary environment.

Fed officials see growth of about 6.5% this year, the fastest increase since 1984.

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