US inflation falls to 5%, but stubborn core reading means battle to bring down prices is far from over

US inflation fell by more than expected to 5 per cent in March, but fears that it will be difficult to bring prices fully under control remain as the core CPI figure remained steady.

A decline in the headline figure from February’s 6 per cent was widely expected, as oil price rises following Russia’s invasion of Ukraine are now accounted for in the comparisons. But the drop in the Bureau of Labor Statistics’ Consumer Price Index exceeded the expectations of economists, who had predicted a fall to 5.2 per cent.

Given the expected headline fall, the core inflation reading may gain more attention. Unlike the headline figure, core CPI - which excludes more volatile food and energy costs -  was close to unchanged at 5.6 per cent.

Transportation saw the highest price rises, at 13.9 per cent. Food prices were up by 8.5 per cent and shelter by 8.2 per cent. On the other hand, energy prices fell by 6.4 per cent.

“US inflation appears to be easing more than expected for the time being, suggesting that the Federal Reserve's actions to combat inflation are having a positive impact without pushing the economy into recession,” said Marcus Brookes, chief investment officer at Quilter Investors. “However, core inflation, which excludes volatile food and energy costs, remains stubbornly high, keeping the possibility of further rate hikes on the table.”

While headline figures have come down substantially since peaking at 9.1% in June, the US has struggled to get core inflation fully under control, with the rate of price rises down by less than one percentage point in the past year.

The UK has not fared much better, as core inflation rose to 5.7 per cent here in February.  Headline inflation, meanwhile, remains in the double digits after a shock rise to 10.4 per cent.

The faster-than-predicted drop in headline inflation may encourage the Fed to consider pausing its rate hikes, but economists still expect a rise when it next meets in early May. The odds of a pause have improved, though, from a one-in-four chance before the BLS published the latest inflation data to one-in-three now.

“Officials have been laser focused on fighting inflation and may decide that additional tightening is required to achieve its target when the FOMC meets later this month,” Charles Schwab UK managing director Richard Flynn said.

On a month-on-month basis, headline inflation was 0.1 per cent, while core inflation was 0.3 per cent.