Five takeaways from the March inflation slowdown

The consumer price index (CPI) fell to a 5 percent annual increase in March from 6 percent in February, the Labor Department reported Wednesday, dropping a full percentage point as prices for goods ranging from fresh produce to automobiles became cheaper.

That’s the lowest level of annual consumer inflation since May 2021. Prices have been coming down since last June, when they topped out at a 9.1 percent annual increase.

Profit crunch: Inflation eases as corporate profits fall from record levels

The Federal Reserve has been slowing economic activity and pushing the economy toward a recession in response to higher prices, but the significant progress in Wednesday’s price report is likely to produce some diverging opinions among central bankers. Fed leaders were already torn over whether the bank should move ahead with rate increases or pause after a historically swift hiking campaign.

Here are five takeaways from Wednesday’s encouraging price report.

Prices have been falling despite a hot labor market

Inflation is traditionally associated with higher wages since labor costs represent the largest component of prices. But wages have not kept up with inflation in the current cycle, except for the lowest earners, who have been making more money relative to inflation.

Some economists had been expecting to see a huge uptick in unemployment as inflation comes down, and the Fed is still expecting to see more than one million people put out of work this year, but so far that increase hasn’t happened.

The economy added 236,000 jobs in March and the unemployment rate decreased to 3.5 percent from 3.6 percent as the workforce grew in size, according to the latest jobs report from the Labor Department.

Still Hiring: Five takeaways from a strong March jobs report

Meanwhile, inflation across various metrics has been coming down, with the personal consumption expenditures (PCE) price index falling to 5 percent and the “core” CPI, which removes energy and food prices, dropping to 5.6 percent from a recent high of 6.6 percent last September.

Real wages increased 0.2 percent in March from February, the Labor Department reported.

Following inflation in the late 1960s, the Nixon administration responded with wage and price freezes, but that policy was swapped in favor interest rate hikes executed by the Federal Reserve during the Carter and Reagan administrations. Those hikes quelled inflation, but only by throwing the economy into a devastating recession.

Have a ham and egg sandwich: food prices are taking a dive

Grocery prices led the way for the overall decline in the March CPI. Food prices rose 8.5 percent annually in March, down from 10.2 percent in February and off a high of 13.5 percent last August. Grocery prices are still much higher than they were a year ago and running well above the headline inflation number of 5 percent, but they’re trending in the right direction.

Egg-cellent news: Monthly egg price decline is largest in 36 years

Meat, fish and poultry prices declined 1.4 percent on the month off a high last spring of more than 14 percent annual inflation. The price of ham dropped 4.8 percent from February to March.

Eggs prices fell off a cliff, at 10.9 percent lower, while butter prices declined by 6 percent.

Bread prices are down 0.3 percent on the month and fresh biscuits, rolls and muffins are down 0.7 percent.

Inflation could fall close to a 2 percent rate this year

Some analysts are sounding very optimistic notes about the trajectory of inflation over the course of the year, arguing it could end up close to the Fed’s 2 percent annual target.

“This report leaves little doubt that the disinflationary process is well underway,” EY chief economist Gregory Daco wrote in an analysis.

“Slower growth in final demand for goods and services, easing housing price inflation and moderate wage growth should combine in the coming month and lead to faster disinflation than expected by the consensus and Fed policymakers.”

Daco predicted inflation will fall to 2.7 percent by the fourth quarter of this year, which is very much in the range of the Fed’s target 2 percent, though some economists say that’s too low.

Wednesday’s slight uptick in core CPI to 5.6 percent from 5.5 percent may make projection less likely, but Daco said he still sees the core falling to an annual rate of 3.3 percent on the year.

Fed officials are disagreeing over rate hikes

U.S. central bankers are not totally in lockstep with each other about whether they’ll keep hiking rates.

New York Fed President John Williams said Tuesday in an interview with Yahoo Finance “inflation is still very high” and that the Fed still has more work to do to bring down prices.

“Jobs growth is actually quite strong still,” he said. “We are seeing some slowing in the demand for labor. But the demand for labor is still very strong.”

But Chicago Fed President Austan Goolsbee suggested that it was time for the Fed to take a break.

“I think that at moments of financial stress like this, the right monetary policy is really caution and watchfulness and prudence,” Goolsbee said Tuesday.

The CME FedWatch prediction algorithm put the chances of a 0.25 percentage point interest rate hike at 66 percent on Wednesday and the the chances of no hike at 34 percent.

Profits are cooling along with inflation, but companies are still ‘sneaking’ surplus

Companies have frequently acknowledged their increased pricing power during this inflationary cycle as well as the willingness of consumers to accept higher prices.

While both profits and inflation are subsiding now, the initial demand-driven inflation that hit as a result of supply shocks has now fully reversed course, while profit margin-led inflation following a commodity shock continues.

“The 2021 transitory inflation driven by demand is now deflation—television prices are more than 21% below their post-pandemic high. The second inflation wave—an energy supply shock—is now disinflationary,” UBS economist Paul Donovan wrote in a note Wednesday morning to investors.

“Profit margin-led inflation remains. As companies sneak profit alongside cost increases, profit margin-led inflation is likely to be stronger at the very start of the year when cost increases are most frequently passed on.”