Inflation cooled to 5% in March, the slowest increase since May 2021

But food and rent prices remained elevated, the Consumer Price Index showed

a paper that reads economy

Inflation’s cooldown accelerated in March, even as food and rent prices remained high.

The Consumer Price Index from the U.S. Bureau of Labor Statistics showed the following for March 2023:

Year-over-year, inflation increased 5%. That’s down significantly from a 6% increase in February. It's the lowest rate since May 2021.

Month–over-month, inflation was up 0.1%, which is also a slowdown from 0.4% in February.

Core inflation, which leaves aside the volatile food and energy categories, increased 5.6% year-over-year.

Food at home, which includes groceries, saw a 0.3% decrease on the month. That was the first time this measure fell since September 2020. Year-over-year, food at home rose 8.4% over the last 12 months, paced by a 13.6% increase in cereals and bakery products.

Shelter, which includes rent, continued to be the primary driver of inflation, as the 8.2% year-over-year increase in this category accounted for 60% of core inflation.

Inflation in other key consumer goods categories, as measured on a year-over-year basis, includes:

  • Apparel: +4%
  • Household furnishings and operations: +5.6%
  • Personal care: +6.5%
  • Toys: +2%

chart showing month-over-month inflation(Source: Consumer Price Index/US Bureau of Labor Statistics)

What does this mean for the consumer economy? The inflation report comes after the Federal Reserve has undergone a monthslong campaign to raise interest rates as it seeks to bring prices down. The Fed’s goal is to bring inflation down to 2%. The report suggests the job is not done yet, but is nevertheless a sign that the increase in prices is slowing more significantly than in recent months.

But there's a tradeoff. The Fed’s aggressive moves to bring down prices also cool the economy as a whole. Combined with Friday’s jobs report that showed the smallest gain in new jobs since December 2020, there appears to be mounting evidence that the impact of the rate increases is taking hold. The question remains as to whether they will take a toll on households – and consumer demand– in the process of bringing prices down.

The report will be taken as good news, but it’s worth remembering that inflation continues to have an impact on households. While price increases are decelerating, the cost of essentials like food, gas, and rent is still high. That means “inflationary behaviors are still prevalent among Americans,” notes GlobalData Managing Director Neil Saunders.

“Along with inflation, households are feeling the impact of higher interest rates which are designed to cool prices but are pushing up variable mortgage rates and increasing interest on credit card and other debts,” Saunders said. “This means consumers are currently in the worst of both worlds, with both prices and debt servicing costs rising. The hope is that one of these issues, inflation, resolves itself over the course of this year – but it looks like this will only happen very gradually, meaning the household squeeze will continue for some time to come.”

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