March CPI preview: Early-year strength in inflation noise or signal?

Summary

The March CPI report will be a key indication of whether the pickup in inflation at the start of 2024 was a function of early-year noise or if inflation's journey back to the Fed's target has been drawn out materially. We believe it will show hints of both dynamics at play. Headline CPI likely rose by 0.4% for a second straight month, which would push the year-over-year rate up to a six-month high of 3.5%. Excluding food and energy, we estimate prices rose 0.3%—a tick softer than in January and February but similar to the pace averaged in Q4, in a sign underlying progress remains stubbornly slow. We suspect core goods fell back into deflation territory in March. Core services inflation, however, was likely little changed as a further moderation in shelter costs was offset by a pickup in services ex-housing.

Looking beyond March, we expect inflation to move lower this year. However, progress will be more of a grind ahead. A rebound in commodity costs have turned food and energy from tailwinds to headwinds. Meantime, supply chain strains are no longer easing. While we believe core goods prices have some additional room to fall over the next few months as earlier benefits of supply chain normalization feed through to prices, services prices will need to cool more markedly to keep overall inflation on its downward path. We expect to see a further moderation in shelter costs help drive the year-over-year rate of core CPI down from 3.8% at present to 3.3% in Q4, although progress is likely to be harder to discern when measured by the PCE deflator, the Fed's preferred inflation gauge.

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