March US inflation falls 100 bps to 5.0% as food and fuel get cheaper

13 Apr 2023 , 09:38 AM

Consumer inflation in March 2023 fell at the fastest clip of 100 basis points from 6.0% to 5.0%. This fall was largely driven by lower food inflation and lower fuel inflation, even as core inflation was marginally higher. Consumer inflation in the US has, now, fallen 410 bps from the peak of 9.1% in June 2022. 

In the US, the anti-inflation hawkishness of the Fed seems to be working; with inflation falling 410 bps corresponding to a 475 bps hike in interest rates. Even in the last Fed meeting in March, the Fed opted to hike the rates by 25 bps, despite the burgeoning banking crisis. This salutary impact on inflation should encourage the US Fed to persist with its hawkish path, for at least another 50 bps.

Inflation has fallen consistently in the US

The fall in US inflation from the peak has  been 410 bps in response to a 475 bps spike in rates. That almost appears proportional. However, more important is the glide path. Since peaking of 9.1% in June 2022, consumer inflation in the US has tapered progressively to 8.5%, 8.4%, 8.2%, 7.7%, 7.1%, 6.5%, 6.4% and 6.0% between July 2022 and February 2023. The month of March 2023 saw the sharpest fall in consumer inflation to 5.0%. If one looks at the break-up of consumer inflation in March 2023, food inflation is lower, energy inflation has dipped into the negative zone and core inflation is marginally higher by 10 bps.

While food inflation has fallen by 100 bps from 9.5% to 8.5%, the real thrust to lower inflation came from energy which dipped into negative at -6.4%. Lower gasoline prices are an outcome of high base effect, but also of weak demand amidst slowdown concerns. However, if one looks at the inflation chart for the last 1 year, the sharp fall in consumer inflation has been driven by food and fuel and to a much lesser extent by core inflation.

Food inflation lower, but energy dips into negative

Even as the impact of the 475 bps Fed rate hike is manifesting in the form of 410 bps fall in inflation, Fed has hinted at more rate hikes. In the March policy, the Fed persisted with rate hikes despite the banking crisis, choosing to keep the two issues separate. Will the Fed persist with rate hikes if the banking crisis worsens? It would not matter as the Fed is already close to its peak inflation target. For now, the Fed is likely to continue to focus on curtailing consumer spending without creating a liquidity crunch in the economy. 

Inflation Basket Category	Mar 2023 (YOY)	Feb 2023 (YOY)	Inflation Basket Category	Mar 2023 (YOY)	Feb 2023 (YOY)
Food Inflation	8.50%	9.50%	Core Inflation	5.60%	5.50%
Food at home	8.40%	10.20%	Commodities less food and energy	1.50%	1.00%
Cereals and bakery products	13.60%	14.60%	Apparel	3.30%	3.30%
Meats, poultry, fish, and eggs	4.30%	6.80%	New vehicles	6.10%	5.80%
Dairy and related products	10.70%	12.30%	Used cars and trucks	-11.20%	-13.60%
Fruits and vegetables	2.50%	5.30%	Medical care commodities	3.60%	3.20%
Non-alcoholic beverages	11.30%	12.30%	Alcoholic beverages	4.50%	4.90%
Other food at home	11.10%	12.40%	Tobacco and smoking products	6.90%	6.70%
Food away from home	8.80%	8.40%	Services less energy services	7.10%	7.30%
Full service meals and snacks	8.00%	8.00%	Shelter	8.20%	8.10%
Limited service meals	7.90%	7.20%	Rent of primary residence	8.80%	8.80%
Energy Inflation	-6.40%	5.20%	Owners’ equivalent rent	8.00%	8.00%
Energy commodities	-17.00%	-1.40%	Medical Care Services	1.00%	2.10%
Fuel oil	-14.20%	9.20%	Physician Services	0.50%	1.20%
Gasoline (all types)	-17.40%	-2.00%	Hospital Services	2.70%	3.60%
Energy services	9.20%	13.30%	Transport Services	13.90%	14.60%
Electricity	10.20%	12.90%	Motor vehicle Maintenance	13.30%	12.50%
Natural gas (piped)	5.50%	14.30%	Motor vehicle insurance	115.00%	14.50%
Headline Consumer Inflation	5.00%	6.00%	Airline Fare	17.70%	26.50%

Data Source: US Bureau of Labour Statistics

The table captures the break-up of the entire inflation basket. Here are some key takeaways. Firstly, food inflation has fallen across the board on a yoy basis, especially in the high protein intake products like milk, eggs, and dairy. Under energy category, weak demand and a high base effect has pulled the overall energy category into negative zone.  Even the inflation in natural gas has fallen sharply in March over February 2023. On the core inflation front, the 10 bps increase over last month is driven by core sector commodities.

MOM inflation tapers to 0.1% in March 2023

The US Bureau of Labour Statistics (BLS) reports inflation on yoy basis, as well as on MOM high frequency basis. After touching a high of 1.2% in June, MOM inflation stayed below 1% all through. However, January and February had seen MOM inflation spike to 0.5% and 0.4% respectively. That has now sobered to 0.1% in March 2023.

Here are key takeaways from the MOM inflation data for March 2023.

1. MOM food inflation has been flat compared to February. The shift came from the Food at Home category seeing -0.3% contraction, the first MOM decline since September 2020. In fact, 3 out of the 6 store food categories saw negative inflation.

    

2. Energy index fell -3.5% MOM in March 2023 as natural gas and fuel oil prices fell but gasoline prices dipped sharply by -4.6%. Electricity was flat to negative in March.

    

3. Core inflation still rose 0.4% MOM in March 2023. The pressure comes from the shelter index rising 0.6% and index for rent rising by 0.5%.

Fed may be encouraged to stay its hawkish course

Fed has already hiked rates by 475 bps since March 2022 and headline consumer inflation is down 410 bps from the peak. Hawkishness is not only reducing inflation but also inflation expectations. The banking crisis, however, could be the joker in the pack.

1. In the March 2023 policy, the Fed hiked rates by 25 bps, contrary to expectations that it may go as far as 50 bps. That was influenced by the banking crisis, but with the crisis subsiding, the Fed may persist with its hawkish stance.

    

2. Even on the labour data front, some pressure is visible as an outcome of higher rates. The Fed may not want to lose out on the momentum created. It needs more of labour slack to be able to achieve its inflation objective.

    

3. The Fed may still look to hike rates by another 50 bps by June and then take a halt. However, it is very unlikely that the Fed would even consider rate cuts in 2023, even if inflation were to weaken further.
    

US inflation number and RBI monetary policy?

What does this mean for India? Even as the RBI closely observes the Fed moves, the RBI has shown in April that it is willing to chart its own course. The fallout of the banking crisis in India has not been much, but higher rates have been hurting corporate balance sheets quite sharply. That would be the driver for Indian macro policy for now.

One more thing the RBI will have to explore is why the inflation impact is not so decisive and obvious in India as it is in the US. RBI is already exploring whether hiking rates aggressively from this point is really the answer to the inflation problem. For instance, trade and industry bodies are already demanding that the RBI goes slow on rate hikes to help protect industry margins. For now, the RBI has experimented with a status quo on rates. Further policy action will be data driven.