U.S. Inflation Edges Up In March But Inflation Expectations Remain Moderate

by: Ed Dolan

The latest data from the Bureau of Labor Statistics shows an uptick in consumer price inflation for the month of March. Separately, estimates by the Cleveland Fed show that inflation expectations remain flat and well below the Fed's target of 2 percent.

As the following chart shows, the all-items consumer price index rose at a seasonally adjusted annual rate of 2.43 percent last month, up from 1.21 percent in January. Food prices helped push the CPI upward, as they did in the previous month. Energy prices, which had fallen by 0.5 percent in February, decreased by just 0.1 percent in March. The core inflation rate, which removes the effect of food and energy prices, rose by 2.48 percent for the month. If we look hard, we can construe the latest inflation data to be consistent with a slight upward trend, as represented by the chart's fourth-order polynomial trend lines, which just brush 2 percent in March.

Before breaking the glass on the inflation alarm, though, we should take a look at expected inflation. The following chart shows five-year and ten-year inflation expectations, based on prices for Treasury Inflation Protected Securities. In the middle of last year, when the Fed first began discussing a tapering of its massive monthly asset purchases, expected inflation rates moved up by about half a percentage point, or 50 basis points. Since then, they have changed little. The latest release shows that both the five-year and the ten-year expected inflation rates remain slightly below the peaks reached in September.

What is more, keep in mind that the chart shows the Cleveland Fed's expectation estimates for CPI inflation. The Federal Open Market Committee instead sets its two-percent policy target for inflation in terms of the deflator for Personal Consumption Expenditures. For various reasons, the CPI inflation rate tends to track about half a percentage point above the PCE rate. That means that expected CPI inflation rates of about 1.8 percent, as shown in the chart, are really 70 basis points lower than the Fed's target, not just 20 points lower.

Although U.S. inflation remains below target, it is reassuring to see that it is not falling, as is the case in Europe. The latest data from across the Atlantic show UK inflation rate falling to 1.6 percent euro inflation to just 0.5 percent. While those numbers raise a real concern of deflation, especially in the Eurozone, we in the United States can take comfort in the fact that the Atlanta Fed's estimate of the probability of deflation remains solidly at zero.

The bottom line: If not quite Goldilocks-perfect, then, the latest U.S. inflation data are at least reassuring. We can channel our worries to more serious matters like long-term unemployment, sluggish GDP growth, and the escalating conflict in Ukraine.