Inflation slowed to a 2.4 percent annual rate in March, the Bureau of Labor Statistics reported Friday, down from 2.7 percent the month before, an unexpected slowdown that could force the Federal Reserve to rethink its hopes for the economy this year.
Thanks to falling gas prices, overall consumer prices actually fell 0.3 percent on the month in March, adjusting for seasonal variations. That was the first such decline since February of 2016, and even bigger than forecasters had anticipated.
Friday’s report is good news for people who have seen savings at gas stations. But it’s also likely to be viewed as a setback by officials at the Federal Reserve. They have been hoping for and expecting higher inflation, which they see as good not for its own sake but as confirmation that the economy overall is improving and that there are fewer unemployed workers that could be put back to work.
If it is followed by more news of slipping inflation, Friday’s report will “complicate the economic and policy outlooks,” remarked Mohamed El-Erian, chief economic adviser at Allianz SE. Earlier in 2017, the Fed had been revising its plans to include more interest rate hikes, a reflection that the economy was heating up faster than expected and that they would need to slow overall spending by raising the price of credit.
While the Fed usually won’t be swayed by a swing in gas prices, which could easily reverse itself in future months, other signs in Friday’s report suggested that the slowdown in inflation was broad-based during the month.
“Core” inflation, which takes out energy and food prices because of their volatility, slowed from 2.2 percent to 2 percent in March. Fed chairwoman Janet Yellen has said that core inflation is a better predictor of future inflation than headline inflation.
The Fed’s target is 2 percent inflation in the long run, measured in a different index. According to that index, inflation ran below target from April 2012 until February, when it just ticked above the 2 percent mark. Friday’s consumer price index report could raise concerns among Fed members that it won’t stay on target.
As for consumer prices, the story of the year through March is gas prices easing off after a run-up in early 2016. Gas prices continued to drift higher in April, data from GasBuddy.com suggest.
Meanwhile, shelter and medical prices have both risen steadily, keeping up inflation overall. But few price hikes on cars and trucks helped moderate overall price gains.
