(Bloomberg Opinion) — Prices of consumer goods, the cause of the U.S. inflation spike over the past year, are showing signs of cooling just as utility costs are accelerating.
Prices of goods excluding food, energy and used cars rose 0.4% in March from the previous month, the smallest advance in a year. That price slowdown was partly due to more moderate increases in the prices of clothing, new cars and household supplies.
Basic service costs, which exclude energy, rose 0.6% from the previous month, the most since October 1992 and in line with a broader reopening of the economy from coronavirus restrictions.
The increase in the prices of car rentals, hotel stays and medical services accelerated. And airline fares posted a record monthly increase of 10.7%. Accommodation costs, which include rents and hotel fees and which make up a third of the headline CPI, rose 0.5% for a second month.
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Inflation Transition | Core goods prices in U.S. show signs of cooling, while costs of services picks up
Economists and policymakers at the Federal Reserve have been looking for signs of a slowdown in goods inflation following many months of increases across the board. While March seems to have shown some respite for merchandise, price increases in services are likely to keep inflation well above the Fed’s target for the rest of the year, keeping the central bank on track to adopt a more restrictive policy approach.
“Slower core goods inflation is partly offset by higher services inflation, underscoring the challenge the Fed faces in reining in price pressures even as supply and demand in the goods sector tighten. balance,” Bloomberg economists Anna Wong and Andrew Husby wrote in a note.
“The Fed needs to raise rates quickly, but if demand for goods continues to cool, they may not need to raise rates as sharply as the market, which is now pricing in nearly three 50bp rate hikes this year, currently expects.” they said.
Another factor that might push service prices higher is labor costs, given the tight labor market, which has a record number of vacancies. Upward pressure on wages fuels risks of further upward pressure on prices for services such as health care, recreation and dining out, economists at Citigroup Inc said in a note.
“This underlying inflationary pressure resulting from a tight labor market might be the most important element keeping the Fed from raising rates rapidly toward its estimate of the long-term neutral rate,” said Citi economists Veronica Clark and Andrew Hollenhorst.
original note:
U.S. Goods Inflation Starts to Cool Just as Services Pick Up
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