Wealth Planning
March CPI: Inflation is still high but continuing to moderate
The March Consumer Price Index (CPI) report showed that while inflation is still too high, it is continuing to moderate. Learn more about the details here.
Key takeaways
- The March Consumer Price Index (CPI) report saw inflation drop to 5% year-over-year, which was better than expected.
- Core inflation, excluding food and energy, rose to 5.6% year-over-year as expected.
- Shelter prices remained stubborn, yet continued to push higher on a year-on-year basis, rising from +8.1% to +8.2%.
- While inflation is continuing to moderate, our strategists expect another 25 basis point interest rate hike at the May 2-3 Federal Reserve meeting.
The March Consumer Price Index (CPI) report showed that while inflation is still too high, it is continuing to moderate. The headline number saw more disinflation than anticipated, dropping from +6.0% in February to a +5.0% year-over-year pace as the core measure (excluding food and energy) rose from +5.5% to +5.6% year-over-year as expected.
The details were encouraging with energy prices falling sharply. However, while shelter inflation grew at its slowest rate in a year it continued to push higher on a year-on-year basis – rising from +8.1% to +8.2%.
Shawn Snyder, Global Investment Strategist for J.P. Morgan Wealth Management, said, “Shelter prices remain stubborn. The shelter index remains the dominant factor in keeping prices elevated. When stripped out, inflation fell from 5.0% in February to 3.4% in March. A pretty noticeable drop.”
Outlook for the Fed
Markets so far are welcoming the numbers, as it gives investors room to focus on the looming corporate earnings season that kicks off with highly anticipated banks later this week.
While inflation seems to be cooling, our strategists assert that the Fed is still likely to view inflation as too high. Snyder noted, “Supercore inflation, which is service prices less energy and shelter prices, remains elevated. The recent data indicate that there are ongoing price pressures in the labor-intensive services sector, and that the labor market will likely need to cool further.”
Assuming there are no more unexpected stresses on the banking system between now and the next Fed meeting, our strategists expect the Federal Reserve to hike interest rates by another 25 basis points in May. A pause may follow should incoming economic data continue to weaken.
On the Fed outlook, Snyder is cautiously optimistic. “We find it encouraging that headline inflation came down by a full percentage point from February to March. However, this is unlikely to change the Fed’s short-term trajectory, and we anticipate at least one more 25 basis point rate hike at the May 2-3 meeting.”
Portfolio implications
So what does this mean for investors? Our strategists expect heightened volatility ahead. Think defensive, but not fearful.
- Fixed income: Our strategists believe that bonds are still in a once-in-a generation dip, and remain focused on the opportunity to lock in elevated short-term yields, or look to extend duration to protect against a potential economic downturn.
- Equities: Equity market resilience is a welcome surprise for many investors. The upside may be limited from here, so investors might have an opportunity to protect gains through hedges that offer downside protection, or transition index exposure to structured notes that may offer a better risk-reward profile. Further, strength in many mega-cap tech names means that there may be a chance to take some profits and diversify across regions, such as Europe and China, as well as sizes with U.S. mid-caps.
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