March inflation report to show CPI surge

A new inflation reading is due out Tuesday morning, and it looks to be a doozy. The Consumer Price Index for March will reflect the surge in energy prices tied to the war in Ukraine, which is likely to push the headline number to yet another multi-decade high.

Why it matters: The biggest question facing the economy now is whether inflation will come down on its own, or require such aggressive Federal Reserve action as to bring a recession. The new numbers will provide fresh evidence of which reality we’re living in.

• Beyond the headline number, the report will include crucial evidence of whether the forces that have driven inflation — largely affecting goods — are starting to fade, and whether rising prices are spreading further into services.

The details: Analysts surveyed by FactSet expect the release to show 8.4% inflation over the last year, which would be the highest overall inflation rate since December 1981. The rate was 7.9% for the year ended in February.

• Excluding food and energy, the forecast is for 6.6% inflation, which would be the highest since August 1982.

Gasoline prices alone are a major culprit. The average gallon of gasoline cost $4.08 in March, according to government data, up 20% from February.

• The good news: That price has already faded a bit, down to $4.02 in the first week of April, which if sustained means gasoline could subtract from future months’ headline inflation number.
• Look for the Biden administration on Tuesday to emphasize the role of Russia’s invasion of Ukraine in generating the nasty inflation number, and to highlight its efforts to bring down fuel costs by releasing oil from the Strategic Petroleum Reserve.

Yes but: The real question for the outlook lies in what is going on with underlying inflation trends — those tied to the economy’s internal dynamics around wages and business pricing power, rather than geopolitical events.

• For durable goods, relief could come if and when supplies stabilize. In one favorable sign, used car prices declined in March according to a much-watched index (more on that from Matt below).
• Still, services excluding energy products account for 57% of CPI, versus only 13% for durable goods. so it wouldn’t take much for the services sector to supplant goods, preventing overall inflation from coming down.

Case in point: Rent price increases have accelerated in each of the last three months, and were up 0.6% in February. That reflects constrained housing supply and rising incomes — and so long as it persists will keep inflation from coming down meaningfully.

• Prices are also rising for services as varied as health insurance and hotel stays. The fading of the pandemic may mean consumers shift their spending toward services, bidding up their price amid finite supply.
• Moreover, companies that sell services are looking to make up for rising wage costs and enjoy the pricing power that comes with robust demand.

The bottom line: The high overall inflation number will get most of the headlines Tuesday morning, but the more important question for the outlook is whether services inflation keeps accelerating even as durable goods inflation fades.