Inflation dropped to 5% in year ending in March, lowest since spring 2021

The Bureau of Labor Statistics released an update to the consumer price index on Wednesday, reporting that inflation rate fell almost a percentage point to 5% in the year ending in March, the lowest rate since May 2021. This drop is good news for the economy, which has been struggling with rising prices for years. Prices rose only 0.1% from February to March, which is lower than what economists had anticipated.

However, underlying inflationary pressures remain strong as indicated by the details in Wednesday’s report. Falling energy prices contributed to much of the decline in the inflation rate; energy prices decreased by 3.5%. Although oil prices have increased significantly since March, the rate of inflation remains lower than expected. If we exclude food and energy prices, the core rate of inflation increased to 5.6% in March, driven primarily by a rise in the index for shelter.

Nigel Green of deVere Group said: “[H]eadline inflation has slowed lower than expectations, but the core reading is outpacing it, suggesting that underlying inflation is coming down much more slowly.”

Although inflation has been high for the past two years, the rate has decreased from its peak of almost 9% in June 2021. The supply chain issues that led to the price increase in 2021 have been mostly resolved as the pandemic recedes further into the past. Additionally, wage growth appears to have stopped since last summer.

The Federal Reserve is currently in the middle of a historical campaign to raise interest rates to curb inflation and economy-wide spending, and it is seeking to confirm that inflation is reducing towards its target of 2%. However, inflation has exceeded this target for every month of President Biden’s tenure except for his first full month.

The economy provides evidence that inflation could continue to decline, and the rate at which wages are increasing suggests that unemployment will decrease further. However, Fed officials face pressure to raise rates even further as economic storm clouds gather, such as banking system unrest and a housing market that has slowed due to higher mortgage rates. If rates increase too much, the economy could fall into a recession.

Fed officials are wary of this possibility and are hesitant to continue raising rates. After the March monetary policy meeting, Fed Chairman Jerome Powell stated that the chance of tighter financial conditions meant that the Fed may not necessarily proceed with further rate hikes. Nevertheless, Powell and others remain committed to bringing down inflation rates to the target set by the Fed. While a recession and rising unemployment would harm workers, inflation has also caused hardships for many people. Food prices have gone up by nearly a fifth, used car prices have risen, and energy prices have gone up by almost 40% since President Biden took office. Additionally, the shelter price index rose by over 13% due to increasing rents after the pandemic.

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