Inflation plunged to a 2.7% annual rate in March, as measured by the producer price index — the lowest level in more than two years.
On a month-to-month basis, the wholesale price index declined by 0.5%, the Bureau of Economic Analysis reported Thursday morning — more encouraging inflation news. The decline was a shock to forecasters who expected a mild increase rather than an impressive drop. The PPI’s headline number is now the lowest it has been since January 2021, and the monthly decrease was the biggest since March 2020.
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The decline is an indication that inflationary pressures are abating in the face of the Federal Reserve’s campaign to slow economywide spending by hiking interest rates.
“Net, net, the economy is slowing with job layoffs rising and core producer prices cooling down,” said Chris Rupkey, chief economist at FWDBONDS. “Producers are likely to cut consumers a break from the rapid price increases they have passed on over the last year. Core producer price inflation has been cut in half from year-ago levels, which shows the rapid Fed rate hikes since March 2022 are starting to bite.”
Nevertheless, inflation is running much hotter than the central bank’s target and dinging household purchasing power. Prices paid by producers eventually translate to prices paid by households.
Given the trendline over the past several months, it appears as though inflation as measured by the PPI peaked and is on its way down. Annual wholesale inflation reached its zenith in March 2022.
The Fed’s target for inflation is 2%, although it uses a different gauge to assess the target.
The high inflation of the past two years has battered household purchasing power and undercut support for President Joe Biden’s economic agenda.
Thursday’s PPI report comes a day after the consumer price index, which is even more closely watched, was released. The CPI fell to 5%, a drop from the month before. The annual CPI inflation rate has been trending down since peaking last June.
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The Fed has been hiking rates for more than a year. This week, the minutes of the Fed’s last meeting in March were released and showed that central bank staff now expect a recession this year.
“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the Fed said in a readout of the meeting.
