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.
Some of the price increases reflected temporary factors, but
others showed how demand for many goods and services is reviving a
year after the coronavirus pandemic shut down large swaths of the
economy, analysts said.
The Labor Department reported Tuesday that its 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 biggest 12-month
increase since August 2018, and rose a seasonally adjusted 0.6% in
March from February.
Nearly half the monthly increase was due to a 9.1% jump in
gasoline prices, which have climbed partly due to production
problems following severe winter storms, economists said.
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 in February 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," 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, " she said. "We see a real awakening of
the service economy in these numbers."
Services prices, excluding energy, rose 0.4% in March from
February, the fastest monthly 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 in March.
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 damped consumer spending. Whether this rise
proves transitory 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.
Fed officials expect inflation to rise temporarily this year
because of growing demand fueled by increased vaccination rates,
decreasing 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.
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 a recent Wall Street Journal survey, putting the U.S.
economy on track for its best performance since the early
1980s.
The annual inflation measurements in coming months will be
boosted as well by comparisons with the figures from last year.
Prices dropped steeply in 2020 because of collapsing demand for
many goods and services -- including air travel, hotels and apparel
-- as the pandemic hit the economy. Many businesses closed and
consumers hunkered down at home.
Gasoline prices, for instance, were up 22% in March compared
with a year earlier. Fuel oil prices were 20% higher.
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 many of its North America consumer products to
help defray higher raw-material costs. A number of other
consumer-products companies -- 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.
Beyond consumer items, many producers of industrial goods and
components are raising prices too. For example, two big U.S.
manufacturers of heating and cooling equipment have announced price
increases. Lennox International Inc. said this week it would raise
prices by about 6% to 9% starting June 1 for commercial and
residential orders. Trane Technologies PLC recently increased
prices by up to 7.5% on some products in its commercial HVAC
business. In early March, Trane boosted prices on some residential
equipment by up to 6%.
"Customers never like higher prices, of course, but they are
busy and seeing increases throughout the supply chain," said Holden
Lewis, the chief financial officer of Fastenal Co., a distributor
of fasteners, tools and other industrial supplies.
The economists surveyed expect this year's inflation pickup to
be transitory. They projected on average that annual inflation,
measured by the CPI, will climb 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, and
receding to 2% in 2022.
Inflation has remained below 2% for most of the past decade, and
Fed officials say they want to see it run above that level for some
time to make up for the shortfall.
Boston Fed President Eric Rosengren said Monday he expects that
inflation will rise this year but not in a worrisome way. "As long
as it's in the 2-2.5% range, which I think is highly likely over
the next two years, I would not be particularly concerned," he said
in an interview with the Journal.
The Fed has said it would start to raise interest rates from
near zero when PCE inflation reaches 2% and is headed higher, and
when full employment has been achieved. Officials last month
projected that point wouldn't be reached until after 2023.
Some economists, however, see rising risks that inflation could
accelerate more than Fed officials expect, forcing them to raise
interest rates sooner than anticipated to cool price pressures.
The March CPI reading signaled a pickup in consumer prices
following months of building inflationary pressures among producers
because of supply-chain problems and rising transportation and
labor costs, said Peter Boockvar, chief investment officer at
Bleakley Advisory Group. He expects these pressures will keep
building into 2022. That will translate into "higher costs for
consumers, higher costs for companies that can't pass it on, higher
interest rates," he said.
Michael S. Derby and Thomas Gryta contributed to this
article.
Write to Gwynn Guilford at gwynn.guilford@wsj.com
(END) Dow Jones Newswires
April 13, 2021 17:46 ET (21:46 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.