US inflation likely to accelerate over next year, rate hike in June seems more likely

US CPI inflation for March was slightly below expectations. Consumer price inflation accelerated 0.1% last month, as compared with forecast of a rise of 0.2%. Earlier this week, producer prices and import prices reports also came in weaker than expected. This shows that even though inflation is accelerating, the overall price environment continues to be weak.

Since November 2015, March data recorded the first rise in headline CPI. A recovery in energy prices, which grew 0.9%, stimulated the headline figure as expected. Gasoline prices, which rose 2.2% sa, helped the energy index to rise to its biggest monthly increase since May 2015. The energy services rose 0.2%. Meanwhile, the food index dropped in March by 0.2%. Food at home index fell 0.5%.

The core CPI also accelerated 0.1% last month. The index rose at an annualized rate of 2.6% in the past three months. Core goods inflation and services inflation diverged in March. Core services inflation accelerated 0.2% with continued rise in personal care services, medical care, transportation, shelter and education. Meanwhile, core goods inflation decelerated 0.2% due to lower user vehicles prices, lower household furnishings and apparel prices.

The trend in core inflation is bolstering even though the rise in March’s core CPI was more modest than in the first two months of 2016. Core CPI rose 2.2% on an annual basis, as compared with 1.8% acceleration in March 2015. Furthermore, for six months, the three-month annualized rate of change has been more than the 12- month change. This shows that there will be more rise in the y/y figure going forward, according to Wells Fargo.

The upward trend of core CPI is a sign that inflation is rapidly returning to the levels in line with the US Fed’s goals, noted Wells Fargo. As the labor market also continues to be strong, a rate hike by the US Fed in June seems possible, added Wells Fargo. But there is likelihood that the central bank will tolerate an additional acceleration in inflation before it goes ahead with hiking rates, said Wells Fargo. The inflation trend continues to be upward even with softer figures.