U.S. inflation slowed to a two-year low in March, data from the Commerce Department indicated Wednesday, although core consumer prices edged modestly higher, suggesting the Federal Reserve's effort to tame inflation pressures continues to deliver mixed results.
The headline consumer price index for the month of March was estimated to have risen 5% from a year earlier, down from the 6% pace recorded in February and just inside the Wall Street consensus forecast of 5.1%. The annualized increase was the slowest since May of 2021
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On a monthly basis, inflation was up 0.1%, the BLS said, compared to a 0.4% reading in February, the June peak of 1.3% and the Wall Street forecast of a 0.2% acceleration.
So-called core inflation, which strips out volatile components such as food and energy prices, rose 0.4% on the month and 5.6% on the year, the report noted. The key monthly reading matched Wall Street forecasts and the annual reading rose 0.1% from the previous month's tally.
"The [headline] number is still 3% above the Fed’s target and remains too elevated for comfort. Shelter and transportation costs remain stubbornly high," said George Lagarias, Chief Economist at Mazars. "Despite the faster than expected drop in inflation, we still expect that the Fed will continue to tighten interest rates at least one or two more times before stopping.”
U.S. stocks traded firmly higher following the data release but pared gains into the session, with the S&P 500 falling 10 points by late morning and the Dow Jones Industrial Average down 30 points. The tech-focused Nasdaq was down 63 points.
Benchmark 10-year Treasury note yields were little-changed at 3.411% in volatile trading while 2-year notes were pegged at 4.002%, after hitting a session high of 4.075% prior to the data release.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.51% lower at 101.677.
CME Group's FedWatch is now pricing in a 72.5% chance of a 25-basis-point (0.25 percentage point) Federal Reserve rate hike on May 3, an estimate unchanged from before the data release. The odds of a pause in June are pegged at 68.5%.
Bets on a Fed rate cut in July, however, have accelerated to around 60% now that inflation appears to have slowed for a sixth consecutive month and bets on a near-term recession have quickened since the collapse of Silicon Valley Bank last month.
Loan conditions have tightened and capital costs have risen for the country's small and medium-sized businesses since the bank, a major lender to the technology sector, failed.
A key report from the National Federation of Independent Business, published Tuesday, also indicated a slowdown in hiring plans, the weakest expansion plans since 2009 and a pullback in selling prices.
Meanwhile, activity in the most important sector of the economy slowed notably last month, according to data from the Institute of Supply Management's benchmark survey.
Two important subcomponents -- measuring employment and prices paid -- indicated cooling inflation pressures heading into the spring and summer months.
The ISM's March survey of manufacturing activity, meanwhile, was pegged at 46.3 -- well below the 50 mark that separates growth from contraction.
Bank of America's weekly Flow Show report noted that readings below 45 have preceded every U.S. recession for the past seven decades.
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