Inflation gathers pace in US, for now

US headline CPI ticked up 0.6% month-on-month in March. This was higher than the consensus expectation for a 0.5% rise.

It marks the largest monthly increase since August 2012.

The inflation index has risen 2.6% year-on-year (y/y), a much larger gain than the 1.7% reported in the previous month.

As expected, the sharp jump in headline inflation was driven by higher energy prices. The effects of a low base given a particularly weak March 2020 also kicked in. This is an effect that’s likely to persist throughout the second quarter of the year.

We expect higher headline inflation in the next couple of months as we forecast headline CPI to rise to 3.5% y/y in Q2.

Core inflation also picked up, gaining 0.3% on the month. Shelter (housing) prices increased 0.3% m/m in March, while prices for transportation services gained 1%  owing to a solid rebound in airline fares and higher oil prices.

The transportation services sector is an “acyclical” component of core inflation. Acyclical components are more sensitive to industry-specific factors compared to cyclical components, which are more sensitive to overall economic conditions.

As highlighted in chart 2 below the acyclical index was up 1.1% y/y in March from 0.4% in February, while cyclical pressure remained muted. 


Source; Refinitiv Datastream, Schroders Economics Group, 13 April 2021.

We continue to expect the rise in inflation to be temporary as underlying inflationary pressure remains low and there is still some spare capacity in the US economy.

Last month’s US job report highlighted that there are still about 8.5 million more Americans out of work than in February 2020.

Despite the large fiscal stimulus, wage pressures are therefore likely to remain muted until the second half of 2022, when the unemployment rate is expected to fall to its natural rate.

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