The Consumer Price Index (CPI) report for March showed that inflation slowed faster than expected across several measures. Headline CPI rose only 0.1% month-over-month (the slowest pace since December) which represents a 5.0% year-over-year rate—the lowest since May 2021. Core CPI rose 0.4% month-over-month and 5.6% year-over-year, driven by services and shelter costs. Despite these improvements, inflation still remains well-above the Federal Reserve’s (Fed) policy target, and upward inflation pressures persist within core services, which is now being closely watched by the Fed. This reinforces the expectation for another rate hike in May, followed by a likely pause, with a higher-for- longer policy thereafter.

Core Consumer Price Index
Year-over-year % change, 1960–present

Core services, core CPI, and core goods, percentage change year-over-year, 1960 to Present

Source: Clearnomics, Bureau of Labor Statistics, Principal Asset Management. Data as of April 12, 2023.

Report details

  • Headline CPI was 0.1% month-over-month in March, which is a slower rate of price increases than expected (0.2%) and much lower than the prior two months. Annual headline CPI fell a full percentage point to 5%, from 6% in February.
  • Energy and food prices helped inflation ease in March. Energy prices declined 3.5% month-over- month due to weaker oil prices. Since then, oil prices have recovered somewhat due to OPEC+ production cuts, but supply restrictions so far have only put a floor under falling oil prices and are not yet expected to lead to a large increase in consumer inflation. Food prices were flat in March, the first time since November 2020, having increased steadily over the past year and having been a significant source of the post-pandemic inflation surge.
  • Core CPI, which excludes food and energy, continued its climb due to the cost of services. The “services less energy” component of CPI increased 0.4%—driven largely by shelter and transportation costs. Excluding shelter, services was flat month-over-month. The Fed will be watching core services closely due to its link to the labor market, as well as being widely understood as the stickiest component of inflation.
  • Shelter costs rose 0.6%, which is an improvement from 0.8% in February. The Fed shares the widely held expectation that rent inflation will slowly abate as new leases are signed at more favorable prices.
  • Core goods inflation has hovered around the Fed’s target inflation levels since last December. Goods less food and energy rose only 0.2% month-over-month, or 1.5% year-over-year.


While these numbers present positive signs that inflation is easing, it also likely relieves some of the pressure on the Fed to hike much further. However, the persistence of core services inflation is unlikely to fully green-light a Fed pause just yet. Today’s CPI report is still robust enough, especially in conjunction with the solid payroll gains reported last Friday, to support the case for another 25 bps hike in May, taking the benchmark rate to 5.00%–5.25%, followed then by a pause to observe the future macro data. There is a divergence of opinion in markets around Fed policy expectations beyond May, but while headline and core inflation remain well above the Fed’s target, the FOMC will likely keep policy rates elevated for quite some time.


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