(Bloomberg) — Consumer-goods prices, at the root of the U.S. inflation spike over the last year, are showing signs of cooling just as services costs accelerate.
Prices for goods excluding food, energy and used cars rose 0.4% in March from a month earlier, the smallest advance in a year. That deceleration in prices was partly due to more moderate price gains for apparel, new cars and housekeeping supplies.
The costs of core services, which excludes energy, rose 0.6% from a month earlier, the most since October 1992 and consistent with a broader reopening of the economy from coronavirus restrictions.
Price growth accelerated for car rentals, hotel stays and medical services. And airline fares posted the largest monthly gain on record, rising 10.7%. Shelter costs, which includes rents and hotel fees and accounts for a third of the overall CPI, rose 0.5% for a second month.
Economists and Federal Reserve policy makers have been looking for signs of slowing goods inflation after many months of broad-based increases. While March appears to have shown some respite for merchandise, price increases in services are likely to keep inflation well above the Fed’s goal for the remainder of the year, keeping the central bank on track to take a more aggressive policy approach.
“Slower core-goods inflation is partly offset by higher services inflation, underscoring the challenge the Fed faces in taming price pressures even if supply and demand in the goods sector were to balance,” Bloomberg economists Anna Wong and Andrew Husby said in a note.
“The Fed needs to hike rates expeditiously, but if goods demand continues to cool they may not need to hike as aggressively as the market — now pricing in almost three 50-bps rate hikes this year — currently expects,” they said.
Another factor that could drive services prices higher is labor costs, given the tight job market with near-record open positions. Upward pressure on wages feeds risks of greater upward pressure on prices for services such as medical care, recreation and meals out, economists at Citigroup Inc (NYSE:C). said in a note.
“This underlying inflationary pressure resulting from a tight labor market could be the most important element keeping the Fed raising rates quickly back towards its estimate of the long run neutral rate,” Citi economists Veronica Clark and Andrew Hollenhorst said.
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U.S. Consumer-Goods Prices Start to Cool Just as Services Costs Pick Up