The benign inflation backdrop is prevailing despite tightening labour market conditions, underscored by other data yesterday showing the number of Americans filing for unemployment benefits back at a 42-1/2-year low last week.
“A rate hike is unquestionably off the table for April, with a June rate increase increasingly unlikely barring a surge in domestic activity and perceived calm on the international front,” said Lindsey Piegza, chief economist at Stifel Fixed Income in Chicago.
The Labour Department said its Consumer Price Index gained 0.1% last month as a rebound in gasoline prices was partially offset by a drop in the cost of food.
Medical care and housing costs also retreated in March after strong increases in the prior two months.
The CPI fell 0.2% in February. In the 12 months through March, the CPI increased 0.9% after advancing 1.0% in February.
Economists had forecast the CPI gaining 0.2% last month and rising 1.1% from a year ago.
The so-called core CPI, which strips out food and energy costs, inched up 0.1% after two strong monthly readings. March’s increase in the core CPI was the smallest since August and followed a 0.3% rise in February.
In the 12 months through March, the core CPI rose 2.2% after gaining 2.3% in February.
The Fed has a 2% inflation target and tracks an inflation measure which is running below the core CPI. Fed Chair Janet Yellen recently expressed doubts about the sustainability of broad gains in prices and said she believed that “transitory” factors were behind the run-up in prices. The Fed’s policy-setting committee meets on April 26-27. Market-based measures of Fed policy expectations have priced out a rate hike at this month’s meeting and have almost eliminated the chances of a move in June, according to CME Group’s FedWatch. It currently gives a 41% probability of a rate increase in November and a 55% chance in December.
The Fed lifted its benchmark overnight interest rate in December for the first time in nearly a decade and policymakers recently forecast only two more rate hikes this year.
The dollar was trading higher against a basket of currencies, while prices for US government debt fell. US stocks were little changed.
In a second report, the Labor Department said initial claims for state unemployment benefits decreased 13,000 to a seasonally adjusted 253,000 for the week ended April 9. That matched the level for early March, which was the lowest since November 1973.
Jobless claims have now been below 300,000, a threshold associated with healthy labour market conditions, for 58 weeks, the longest stretch since 1973.
Labour market strength comes despite recent reports on trade, wholesale inventories, retail sales and business spending suggesting economic growth almost halted in the first quarter after posting a 1.4% annualized rate in the fourth quarter of 2015.
Growth estimates for the January-March quarter are as low as a 0.2% pace.
“Low labour market separations and steady payroll gains should produce healthy household income growth over the next few months, indicating the likelihood of a rebound in consumption and overall GDP growth following the apparent softness in the first quarter,” said Jesse Hurwitz, an economist at Barclays in New York.
Last month, gasoline prices rose 2.2% after plunging 13.0% in February. Food prices fell 0.2%, with the cost of food consumed at home posting its largest decline since April 2009.
The core CPI was restrained by housing and medical costs, as well as apparel. Owners’ equivalent rent of primary residence increased 0.2% after increasing 0.3% in February.
Medical care costs slowed their rapid ascent, gaining only 0.1% after shooting up 0.5% in February. Apparel prices fell 1.1% in March, reversing the prior month’s 1.6% advance.
Despite the moderation in the core CPI last month, economists believe that a fading dollar rally, stabilising oil prices and tightening labor market have laid the foundation for a pick-up in inflation this year.