REUTERS/Eduardo Munoz
- A popular gauge of US inflation rose faster than expected in March as the economy reopened.
- Consumer prices rose 2.6% year-over-year, partially lifted by March 2020's drop in price growth.
- The Fed has signaled that reopening will drive a strong but transitory surge in inflation.
- See more stories on Insider's business page.
Prices of common consumer goods rose faster than expected last month as widespread reopening accelerated the economic recovery.
The Consumer Price Index, a popular measure of overall inflation, gained 0.6% from February to March, according to data published by the Bureau of Labor Statistics. Economists surveyed by Bloomberg had expected an increase of 0.5%. The reading follows a 0.4% gain in February. A 9.1% surge in gasoline prices drove the bulk of the uptick.
Core inflation – which excludes volatile energy and food prices – increased 0.3%. That also exceeded the median estimate of a 0.2% month-over-month jump.
Consumer prices jumped 2.6% year-over-year, marking the largest increase since the pandemic began. The reading also exceeded the economist forecast of a 2.5% climb. The measure is somewhat skewed, however, by data from March 2020, when prices declined when the pandemic first froze economic activity. That drop artificially lifts the year-over-year figure by giving the latest measure a lower bar to clear.
"We expect year-over-year inflation to remain steady as the upward pressure of a fast-reopening economy and fiscal stimulus is counteracted by somewhat tougher year-over-year comps," David Kelly, chief global strategist at JPMorgan Asset Management, said.
Still, the increases suggest inflation will strengthen through the economic recovery, as expected. Price growth trended below the Federal Reserve's 2% target for decades, signaling consistently weak demand. Now, with businesses reopening, consumers deploying stimulus-boosted savings, and hiring picking up, economists expect inflation to come in above 2% for some time.
The Fed anticipated such a bounce and has dampened concerns that inflation will run rampant. The central bank adjusted its inflation target in August to pursue above-2% inflation for a period of time to counter years of below-target price growth.
Fed Chair Jerome Powell has said that, while reopening will drive stronger inflation, the effect will likely be "transitory" and quickly fade as the economy enters a new normal.
"It is more likely that what happens in the next year or so is going to amount to prices moving up, but not staying up. And certainly not staying up to the point where they would move inflation expectations above 2%," Powell said in early March, adding the central bank will "be patient" in waiting to pull back on its ultra-accommodative policy.
Americans, however, aren't yet buying Powell's message. The median expectation for one-year inflation rose to 3.2% last month, its highest point since 2014. The estimate for three-year inflation edged higher to 3.1% from 3%. Though the Fed hasn't clarified how high it's willing to let inflation run, 3% price growth would be the strongest since the early 1990s.
While it's true that inflation expectations have steadily landed above actual inflation for decades, expectations alone can drive inflation higher. Businesses tend to lift prices and workers usually demand higher wages when the country expects stronger inflation over the next year.