March may have seen US inflation peak but it will likely take time to retreat 

While the Fed has opened the door for a half-percentage point increase in interest rates, inflation isn’t likely to recede to the central bank’s 2% goal any time soon.

US consumer prices rose in March by the most since late 1981, underscoring the painfully high cost of living and reinforcing pressure on the US Federal Reserve to raise interest rates even more aggressively.

The consumer price index increased 8.5% from a year earlier following a 7.9% annual gain in February, new data showed. The widely-followed inflation gauge rose 1.2% from a month earlier, the biggest gain since 2005. 

The March consumer price reading represents what many economists expect to be the peak of the current inflationary period, capturing the impact of soaring food and energy prices after Russia’s invasion of Ukraine.

Petrol costs drove half of the monthly increase, while food was also a sizeable contributor, as Americans paid more for vegetables, meats and dairy products. 

The figures are “a welcome respite from the sustained heated core increases of late, and fuel costs look to ease in response to the recent pullback in oil prices”, Sal Guatieri, senior economist at BMO Capital Markets, said. 

“However, food, rent, and a few other items look to remain troublesome and act to slow the expected retreat in inflation in the year ahead,” he said.

While the Fed has opened the door for a half-percentage point increase in interest rates, inflation isn’t likely to recede to the central bank’s 2% goal any time soon.

At the same time, risks that inflation will tip the economy into recession are building. A growing chorus of economists predicts that activity will contract either because consumer spending declines in response to higher prices, or the Fed will over-correct in its effort to catch up. However, the majority still expects the economy to grow.

Europe

Eurozone government bond yields fell on Tuesday, after the US inflation numbers. The focus is turning to Thursday's ECB meeting which could mark another tense moment for policymakers caught between inflation and the economic hit from the war in Ukraine. 

Germany's 10-year government bond yield, the eurozone benchmark, fell slightly to 0.78% after hitting its highest since July 2015 at over 0.87%. 

The yield on the Irish 10-year bond also fell slightly, to 1.4%. The Irish yield was trading at 0.75% on February 24, when Russia started its invasion of Ukraine, and reached 1% on March 17. 

Reuters and Irish Examiner