US inflation falls for the first time in more than a year, reinforces gradual rate hike path

A report by the Labor Department on Friday showed U.S. Consumer Price Index dropped 0.3 percent in March, the first decline since February 2016. March US CPI inflation was much weaker than expectations for an unchanged reading. Declining costs for gasoline and mobile phone services offset rising rents and food prices.

The core CPI, which strips out food and energy costs, declined 0.1 percent, the first and largest decrease since January 2010, after rising 0.2 percent in February. The year-on-year increase slowed to 2.0 percent, which was the smallest advance since November 2015 and followed a 2.2 percent increase in February.

Several of the declines in March appear outsized and are likely to be reversed. A 6.2 percent drop in gasoline prices was the biggest factor in the monthly decline in the CPI. Monthly consumer inflation was also weighed down by a record 7.0 percent drop in the cost of wireless telephone services.

The Fed has a 2 percent inflation target and tracks an inflation measure which is currently at 1.8 percent. The March CPI report indicates that this may be taking longer than we expected to play out. Despite the annual trend in the Consumer Price Index being still upward, the monthly decline could reinforce the Federal Reserve’s plan for gradual rise in interest rates.

"Some Fed officials will be disturbed by the unexpected drop back in core inflation, but this won't prevent a June rate hike," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.