Tomorrow morning the Labor Department releases its monthly inflation report for March at 8:30 a.m., and economists surveyed by Bloomberg expect both the overall index and the core index (less volatile energy and food prices) to tick up 0.2 percent. The last two months saw solid growth in the core number, with a 0.3 percent jump in February and a 2.3 percent increase for the 12-month figure, signaling a recovering economy. But can that momentum be sustained? Here are five things to watch in the report.
1. Core Inflation Number
The core rate is what economists look at to see how the economy really is doing, and the consensus is that there will be a modest level of inflation, particularly as wages slowly move up and businesses have a little more pricing power. But the thing to remember is that inflation continues to remain near historic lows. What will be of interest, especially to the Federal Reserve, is if there’s another 0.3 percent or higher uptick in prices, which will give the Fed bargaining power for raising interest rates in June — particularly should other indicators, such as the Personal Consumption Expenditures index, follow suit.
“The overall low level of inflation is indicative of the fact the economy still isn’t back from great recession,” said Gus Faucher, deputy chief economist for PNC Financial Services. “If we do see inflation pick up, it’s an indication the economy is on better footing.”
2. Energy and Food Prices
Just because they’re not included in the valued core number doesn’t mean energy and food prices should be ignored. Oil prices started to recover in March, heading back to $40 per barrel, and that could cause the headline rate to spike for a one-time correction, said Mikhail Melnik, associate professor of economics at Coles College of Business at Kennesaw State University in Georgia. While other economists are predicting closer to a 0.2 percent increase for the headline CPI number, Melnik is looking for a 1.0 percent rise to adjust for the oil-price reversal.
Food also increased in February after declining or remaining stable the prior three months. But El Niño has battered crops this winter, especially tomatoes, and there could be another price jump.
“Food will be the wildcat here,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities.
After four months of declines at the end of 2015, apparel prices spiked in January and especially February (1.6 percent), helping to offset declines in energy prices those months. But economists think this may have been a result of increased shopping during the holiday season and not a sustained turnaround for the somewhat volatile category.
“We’re looking for a March decline,” Mulraine said, calling the price jump a “seasonal quirk in data.”
4. New and Used Vehicle Prices
After setting records last year, new vehicle sales seem to have plateaued, according to dealers, and the recent price increases for this category may level off or reverse in March. As for used cars, the price could be rising because of lack of supply: Fewer new cars were sold during the recession, so there are fewer used cars available now.
“The strong auto market allowed dealers and manufacturers to increase prices, but we saw a slight drop from February to March, indicating that [they] may need to resort to incentives more,” Faucher said.
5. Health Care Costs
Medical costs have been on the rise for both commodities and services for the past five to six months and have strong 12-month increases of 2.2 percent and 3.9 percent, respectively. But not all economists believe those are sustainable rises, and they could be attributed to end-of-year and beginning-of-year premium hikes. They’ll definitely be watching these numbers.
“Health care inflation has slowed a lot in recent years, so it’s hard to say it’s picking up again,” said David H. Sloan, senior economist at 4cast, Inc. in New York.