Inflation fell nearly a percentage point to 5% in the year ending in March, the Bureau of Labor Statistics reported Wednesday in an update to the Consumer Price Index, the lowest such rate since May of 2021.
The drop in headline inflation is welcome news for an economy wracked by soaring prices for several years. But the news from the report was not all as encouraging — inflation with the volatile categories of food and energy stripped out – a measure known as “core” inflation, edged up to 5.6%.
Prices rose 0.1% on a month-to-month basis, that is, just from February to March.
Soaring inflation has buffeted households over the past two years and undercut support for President Joe Biden and his agenda.
The Federal Reserve, which is in the middle of a historic campaign to raise interest rates to slow economy-wide spending and curb the price gains, has been looking for confirmation that inflation is headed down toward its 2% target – which has been exceeded for all but the first full month of Biden’s tenure as president.
Inflation peaked in the CPI at nearly 9% last June and has trended downward since. The economy provides plenty of clues that it could continue falling. One is that the supply-chain problems that drove up prices in 2021 have been sorted out, to a large degree, as the pandemic has faded further into the past. Another is that wage growth appears to have slowed after peaking last summer.
Yet Fed officials face pressure to continue raising rates even as economic storm clouds gather in the form of banking system turmoil and a housing market that has been frozen by higher mortgage rates. That is because, in the basic mental model used by Fed officials, low and falling unemployment puts upward pressure on inflation. At 3.5% in March, unemployment is near as low as it has been over the last half-century, and persistently strong job gains suggest it will fall further.
If the Fed raises rates too far, many economists fear, it will tip the economy into recession.
Officials are especially wary of that possibility in light of signs that banks may be pulling back on extending credit in the wake of the collapse of Silicon Valley Bank and the problems that have spread to other parts of the financial system. After the March monetary policy meeting, Chairman Jerome Powell said that the prospect of tighter financial conditions meant that the Fed might not necessarily go through with further rate hikes.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Still, Powell and others have said they are intent on getting inflation down to the Fed’s target. Powell has noted that while a recession and rising unemployment would be bad for workers, inflation has also inflicted major hardship on many people.