US March CPI Shows Another Large Monthly Increase

Location: Toronto
Author: RBC Economic Research
Date: Monday, April 18, 2011

04/14/11 - Overall inflation continues to kick out sizeable monthly increases rising a solid, although expected, 0.5% in March, thereby matching a similar-sized increase in February. Most of the upward pressure came from energy prices, which rose 3.5% in the month although there was another surprisingly large 0.8% increase in food prices. We had expected some moderation in this component with some weather-related problems in February expected to be reversed as was evident in yesterday’s March PPI report.

In the event, this component showed an even stronger gain relative to the 0.6% increase recorded in February with pressure relatively broadly based. This pressure offset core, or ex-food and energy, prices rising a weaker than expected 0.1% in the month. Expectations had been for a 0.2% rise. The strong overall gain sent the year-over-year rate up to 2.7% from 2.1% in February and a recent low in November 2010 of 1.1%. The modest monthly gain in core prices did not prevent a rise in the annual rate on this basis although the increase was relatively slight rising to 1.2% from 1.1% in February.

The modest gain in core prices was helped by declines in apparel prices (0.5%) and household furnishings (0.1%). These declines provided some offset from another large increase in new vehicle prices, which rose 0.7% after a 1.0% gain in February. Airline fares also rose a robust 1.9% reflecting rising fuel costs.

Today’s March CPI report is showing the effect of rising commodity prices with the annual rate of inflation rising to 2.7% from 2.1% in February. On a core basis, however, inflation remains quiescent rising only 1.2% during the past year. A still high unemployment rate, despite recent declines, is seemingly helping to restrain price increases outside of the energy and food components. The latest Beige Book report released earlier this week indicated that retailers were meeting more resistance than manufacturers in passing through cost increases.

The persistence of this low core inflation provides scope for the Fed to focus on strengthening the pace of the expansion by maintaining the current highly stimulative monetary conditions. Although the Fed may start allowing debt to fall off its balance sheet as it matures in the second half of this year, we are not assuming any increase in Fed funds from its current range of 0% to 0.25% until 2012.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

To subscribe or visit go to:  http://www.riskcenter.com