By Gwynn Guilford 

U.S. consumer prices rose sharply in March as the economic recovery gained momentum, marking the start of an expected monthslong pickup in inflation pressures.

The Labor Department reported Tuesday that the consumer-price index -- which measures what consumers pay for everyday items including groceries, clothing, recreational activities and vehicles -- jumped 2.6% in the year ended March, the highest since August 2018, and rose a seasonally adjusted 0.6% in March from February.

The so-called core CPI, which excludes the often-volatile categories of food and energy, climbed 1.6% over the prior year, and was up 0.3% in March from February.

The CPI increased more sharply in March than in February, when it rose 1.7% on an annual basis and 0.4% from a month earlier. Core CPI that month was up 1.3% over the previous year, and 0.1% versus January.

"One of the major things we're seeing that marks a big change from recent years is that really for the first time in a decade you have a wide range of businesses with pricing power right now -- we're seeing that across the goods sector and the services sector," said Sarah House, senior economist at Wells Fargo Securities. "After a year of closures, people are eager to get out and spend, and they have the means to do it."

The acceleration in the overall CPI in March came in large part from energy prices, particularly gasoline prices, which climbed 9.1%, said Gus Faucher, chief economist at the PNC Financial Services Group. "Those big increases won't last, and core inflation was moderate at 0.3%," he said. "I won't be concerned until we see a sustained acceleration in core inflation -- monthly readings of 0.4% or higher for more than just a few months."

Economists widely expect consumer prices to keep climbing in the months ahead after nearly a year of muted overall inflation as the Covid-19 pandemic doused consumer spending. Whether this rise proves temporary is one of the key questions for markets and the U.S. recovery over the next year or so, as the Biden administration, Congress and the Federal Reserve continue to provide financial support for the economy.

The Fed expects inflation to rise temporarily this year because of growing demand fueled by increased vaccination rates, falling restrictions on businesses, trillions of dollars in federal pandemic relief programs and ample consumer savings.

More than a third of Americans have now received at least one Covid-19 vaccine shot, according to the U.S. Centers for Disease Control and Prevention, and Congress last month approved another $1.9 trillion in fiscal support. On March 31 President Biden proposed spending $2.3 trillion over eight years on infrastructure and other investments.

Economists forecast real U.S. gross domestic product will grow at a seasonally adjusted annual rate of 8.1% in the second quarter, according to The Wall Street Journal's recent survey, putting the U.S. economy on track for its best year since the early 1980s. As demand rebounds, higher prices -- and, as a result, higher interest rates -- are to be expected.

Services prices, excluding energy, rose 0.4% on the month, the fastest pace since July 2020, as the country's recovery from the initial Covid-19 impact took off. Prices for hotels, car rentals, airfare and admission to sporting events were all up over the past month, noted Ms. House.

"We see a real awakening of the service economy in these numbers," she said.

The annual inflation measurements in coming months will be boosted as well by comparisons with the figures from last year, when prices dropped steeply because of collapsing demand for many goods and services -- including airfares, hotels and apparel -- as the pandemic hit the economy, many businesses closed and consumers hunkered down at home.

These so-called base effects will boost the 12-month CPI readings further in April and May, and start diminishing in June, said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "But prices will still be supported by the economy reopening, especially the service sector, which will unleash demand."

Meanwhile, rising production costs are already pushing up prices of many household goods. Kimberly-Clark Corp., the maker of Huggies diapers and Scott paper products, said last week that it will start raising prices on much of its North America consumer products to help defray higher raw-material costs. A number of other consumer-products makers -- including Cheerios maker General Mills Inc., Skippy peanut-butter maker Hormel Foods Corp. and pet-snacks maker J.M. Smucker Co. -- have indicated similar plans.

The economists surveyed expect this year's inflation pickup to prove transitory. They projected on average that annual inflation, measured by the CPI, would rise to 3% in June, which would be the highest rate since 2012, before falling to 2.6% by December.

Fed officials also expect the inflation surge to pass. Their 2% inflation target is based on a different measure: the price index of personal-consumption expenditures, which tends to run a bit below the CPI. Their latest projections show annual PCE inflation rising from 1.6% in February to 2.4% by the fourth quarter, receding to 2% in 2022 and edging up to 2.1% by the end of 2023.

The Fed has said it would start to raise interest rates from near zero when PCE inflation reaches 2% and is headed higher, and full employment has been achieved. Officials last month projected they wouldn't reach that point until after 2023.

Some economists, however, see rising risks that inflation could keep accelerating more than the Fed expects, forcing it to raise interest rates sooner than anticipated to cool price pressures.

Write to Gwynn Guilford at gwynn.guilford@wsj.com

(END) Dow Jones Newswires

April 13, 2021 10:58 ET (14:58 GMT)