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Inflation Accelerated in March Due to Strengthening Economy --3rd Update

04/13/2021 | 03:46pm EDT

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

04-13-21 1746ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.03% 0.7841 Delayed Quote.1.22%
BRITISH POUND / US DOLLAR (GBP/USD) -0.01% 1.3987 Delayed Quote.1.61%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.12% 0.8243 Delayed Quote.4.73%
EURO / US DOLLAR (EUR/USD) 0.00% 1.2162 Delayed Quote.-1.22%
FASTENAL COMPANY 0.70% 53.25 Delayed Quote.8.29%
GENERAL MILLS, INC. -0.93% 63.05 Delayed Quote.8.23%
HORMEL FOODS CORPORATION -0.70% 47.14 Delayed Quote.1.14%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.00% 0.013643 Delayed Quote.-0.75%
LENNOX INTERNATIONAL INC. 1.67% 348 Delayed Quote.24.93%
LONDON BRENT OIL -0.07% 68.2 Delayed Quote.32.01%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.70% 0.72793 Delayed Quote.0.73%
TRANE TECHNOLOGIES PLC 0.97% 183.68 Delayed Quote.26.54%
WELLS FARGO & COMPANY -0.19% 46.54 Delayed Quote.54.21%
WTI -0.07% 64.833 Delayed Quote.34.68%
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