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04 14 2016 | by Victor Xing | Economics

March CPI: below consensus as major indices retreat

The March CPI came in below consensus at 0.09% MoM vs. 0.2% survey, and core CPI disappointed at 0.07% vs. 0.2% expectations.

The decline was seen across major indices: the surge of apparel inflation in the prior months was sharply reversed (-1.12% MoM) in the latest report, prices for medial care fell, and the seemingly unstoppable rental inflation (owners’ equivalent rent) also cooled (0.21% MoM vs. 0.25% prior) in March, possibly due to reasons highlighted in a recent WSJ article citing rising rental supply.  Nevertheless, some sectors within the price index did regain some strength, as the volatile energy sub-component rose 4.04% MoM vs. -4.50% prior

CPI on a month-over-month basis:

  • Headline CPI at 0.09% MoM vs. 0.2% consensus and -0.17% prior (thanks to the energy boost)
  • Core CPI at 0.07% MoM vs. 0.2% survey and 0.28% prior
  • OER at 0.21% MoM vs. 0.25% prior
  • Medical care at 0.11% MoM vs. 0.51% prior
  • Apparel at -1.12% MoM vs. 1.63% prior
  • New vehicles at -0.04% MoM vs. 0.23% prior
  • Energy at 4.04% MoM vs. -4.50% prior
March CPI
CPI on a month-over-month basis

CPI on a year-over-year basis:

  • Headline CPI at 0.87% YoY vs. 0.97% prior
  • Core CPI at 2.2% YoY vs. 2.34% prior
  • OER at 3.12% YoY vs. 3.16% prior
  • Medical care at 3.29% YoY vs. 3.50% prior
  • Apparel at -0.59% YoY vs. 0.86% prior
  • New vehicles at 0.44% YoY vs. 0.63% prior
  • Energy at -12.56% YoY vs. -12.48% prior
March CPI
CPI on a year-over-year basis

Policy implications and market reaction

The softer price pressure seen in March would vindicate Fed Chair Yellen’s concerns on the sustainability of recent firming in core inflation:

Core inflation, which excludes energy and food prices, has also picked up, although it remains to be seen if this firming will be sustained. In particular, the earlier declines in energy prices and appreciation of the dollar could well continue to weigh on overall consumer prices.

And the reversal in apparel would also support Chair Yellen’s volatility argument:

We did take note in the statement of the fact that inflation has picked up in recent months. I see some of that as having to do with unusually high inflation readings in categories that tend to be quite volatile without very much significance for inflation over time. So I’m wary and haven’t yet concluded that we have seen any significant uptick that will be lasting in, for example, in core inflation.

Moreover, the rise in rental supply is a concern for OER, which is the single largest component in the aggregate index.  Softer rental price inflation would weaken a major support pillar for core CPI (while energy exert out-sized impact on headline CPI).

Following the report, investors initially reduced rate hike probabilities and pushed the 5s30s curve steeper, but the curve had only flattened out of the subsequent 30yr auction (came 2 bps through).

March CPI
5s30s (in FV and WN futures)

Fed funds futures saw a brief rally before weakening on the follow:

March CPI
Jan 2017 Fed funds futures (since mid March)

Next article04 06 2016 | by Victor Xing | Central Banks

March FOMC minutes: divisions within the Committee