US Inflation Slows Down, Prompting Federal Reserve to Reconsider Interest Rate Hike

Release of US Consumer Price Index (CPI) Figures by US Bureau of Labor Statistics (BLS)

The US Bureau of Labor Statistics (BLS) has released the Consumer Price Index (CPI) figures for March 2022. The annual inflation rate has slowed down to 5.2% year-on-year, which is a significant decrease from the 6% rate in February. The CPI is expected to be at 0.2% on a monthly basis, down from the 0.4% increase in February.

The forecasts made by economists and researchers from major banks suggest that this decrease in inflation is due to lower energy prices, which have eased the March headline inflation to around +0.2% MoM, according to Danske Bank. Commerzbank has stated that the decline in March’s inflation is due to prices being compared with those in March 2022, when energy prices had already risen significantly due to the Ukraine war.

Despite this drop in inflation rates, prices on a “core” basis, which strips out the more volatile costs of food and gas, are expected to have risen 0.4% over the prior month and 5.6% over last year due to elevated rent and owners’ equivalent rent inflation.

Effect on Federal Reserve’s Interest Rate Hike Policy

The Federal Reserve has been raising interest rates to bring down inflation rates as it was significantly above their target of 2%. However, there are concerns that hiking rates too high too fast might send the economy into a recession.

The bank is closely monitoring the CPI data for March before making any decision about federal interest rate hikes. The latest jobs report showed a slowdown in hiring last month but did not halt the rate-hiking campaign of the Federal Reserve.

Market analysts predict a 70% chance of another 0.25% rate increase by the Federal Reserve in May. Oxford Economics’ lead US analyst predicts a 25 basis point hike in June depending on the data to be released before then, including CPI and retail sales.

India’s Consumer Price Inflation Forecast for March 2023

In other news, economists are expecting the release of data for consumer price inflation for March 2023 in India. The median forecast suggests that inflation will fall within the Reserve Bank of India’s inflation target range for the third time in the twelve months of 2022-23, which is welcome news for policymakers after consecutive months of high inflation.

Food inflation, which accounts for more than 40% of the consumer price index basket, is expected to have eased further in March, leading to a drop in overall inflation. Food inflation fell marginally from 6% in January to 5.95% in February and was among the primary factors of high inflation between December 2022 and February 2023.

A high base effect is expected to push March CPI down to 5.7%, with most of the moderation felt in food inflation. The RBI’s Monetary Policy Committee (MPC) has marginally reduced its inflation projection for FY24 from 5.3% to 5.2% based on expectations of record rabi food grain production.

Inflation is likely to remain at sub-5% in April-June, driven by favourable base effects. The MPC is unlikely to hike further unless inflation once again moves above or closer to the upper threshold of the mandated band of 2%-6%.

Overall, there are positive signs that global inflation rates are starting to come under control, but it remains a critical issue for policymakers worldwide. The release of these latest CPI figures will guide future monetary policy decisions by central banks like the Federal Reserve and Reserve Bank of India.

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