Inflation surged in March, the Bureau of Labor Statistics (BLS) reported today. The Consumer Price Index (CPI) rose 0.9 percent last month — triple February’s 0.3 percent pace and the largest monthly increase since early in the pandemic. On a year-over-year basis, headline inflation jumped to 3.3 percent from 2.4 percent, reversing months of steady disinflation in a single report.
But strip out food and energy, and the picture looks entirely different. Core inflation rose just 0.2 percent in March, unchanged from February. Year-over-year, it edged up only slightly to 2.6 percent. In other words, the broad price pressures that keep Fed officials up at night barely moved.
The culprit is no mystery: energy. The energy index surged 10.9 percent in March — the largest monthly increase since September 2005 — and gasoline prices jumped 21.2 percent, a record monthly increase, as the conflict with Iran and the disruption to shipping through the Strait of Hormuz sent oil prices sharply higher. Shelter, which accounts for about a third of the index, rose a modest 0.3 percent. Food prices were flat, with a small decline in groceries offset by a small increase in restaurant prices.
Within core categories, the gains were concentrated in a handful of volatile items: airline fares jumped 2.7 percent, apparel rose 1.0 percent, and transportation services increased 0.6 percent. Working in the other direction, medical care fell 0.2 percent after a 0.5 percent increase in February, personal care declined 0.5 percent, and used cars and trucks dropped 0.4 percent for the second straight month. On balance, the decliners roughly offset the gainers, which is why core inflation held steady.
The three-month trend makes the headline–core divergence even starker. Over January through March, headline CPI averaged 0.47 percent per month — equivalent to a 5.6 percent annualized rate, well above the 3.3 percent year-over-year figure. But virtually all of that acceleration comes from March’s energy spike. Core CPI over the same three months averaged just 0.23 percent per month, or about 2.8 percent annualized — barely above its 2.6 percent year-over-year pace. The underlying trend, in short, has not changed much.
Although the Federal Reserve officially targets the personal consumption expenditures price index (PCEPI) rather than the CPI, the distinction between headline and core is especially important this month. An energy-driven price spike, however dramatic, is not the kind of broad-based inflation that would warrant a policy response. Markets seem to agree: the CME Group’s FedWatch tool now indicates that the Fed will almost certainly hold rates steady at its meeting later this month.
The latest labor market data reinforce the case for patience. March payrolls rebounded by 178,000 after February’s revised 133,000 decline, and the unemployment rate ticked down to 4.3 percent. But perhaps more telling is what happened to wages: year-over-year earnings growth slowed to 3.5 percent, the weakest reading since May 2021. That suggests the nominal spending pressures that drive sustained inflation are easing, even as a geopolitical shock temporarily distorts the headline numbers.
The Fed can afford to look through the March energy spike. Core inflation is well-behaved, wage growth is moderating, and the 0.9 percent headline reading is a reflection of what is happening in the Strait of Hormuz, not in the domestic economy. The real question is whether elevated energy costs linger long enough to raise inflation expectations. If they do, the calculus changes. But for now, the data suggest the Fed should hold steady.
