The markets heaved a sigh of relief as US inflation dropped down in March. The US CPI index for March was released on April 12 by the U.S. Bureau of Labor Statistics (BLS). Even though the headline inflation rate continues to improve, the core inflation rate, which is closely tracked by the Fed, is proving a roadblock in its course towards cooling.

The consumer price index (CPI) eased favorably in March, from 6% year-over-year to 5%. Unfortunately, the majority of the good news ends there. The core consumer price index which excludes food and energy rose 0.4% from the prior month following a 0.5% gain. Given that its annual rate increased from 5.5% to 5.6% in March, Core CPI was a little hotter than anticipated. Core inflation, which excludes costs from the food and energy sectors, is the change in prices for products and services.

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Although the annualised gains over one, three, and six months are downward sloping, the core CPI curve is rather flat. Additionally, core CPI is currently exceeding headline CPI across all durations. This indicates that underlying inflation pressures are not yet diminishing or approaching the Fed’s target of 2%.

The services sector of the economy is mostly responsible for the core pressure, but a factor to watch in the near future is the probable slowing in goods disinflation. If that were to occur and services continued to be sticky, core inflation might remain high for a longer period of time. That would undoubtedly be challenging for the Fed.

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The Fed is certain to raise interest rates at least once more before what they claim will be an extended pause, despite the fact that policymakers are keenly monitoring for any indication that the new banking upheaval is having a negative impact on the economy.

Therefore, even though the headline inflation trend appears to be on the down, the Fed won’t be able to declare victory against inflation unless core inflation numbers continue to decline steadily. Markets may have discounted the rate increase that is expected to be announced on May 3, but starting in the middle of 2023, the US recession will command attention.