March CPI Increase Reverses Effect of Year-Ago Decline,

Reinforces Case for Four Rate Hikes This Year 

The 0.2% increase in the core CPI index in March, in line with market expectations, lifted the 12-month rate from 1.86% in February to 2.11% in March. That increase exceeded the decline in the 12-month rate in  March 2017, when the core CPI fell. That decline was generally attributed in large part to a price level shock that would depress inflation until it moved out of the 12-month window, which it now has. The rise in the core CPI in March will likely translate into a 0.2% increase in core PCE prices in March. That would raise 12- 

month core PCE inflation from 1.6% in February to 2.0% in March. The 12-month core measures are once again the best measures of underlying inflation. We have been expecting 2% core PCE inflation this year and were a little surprised that the FOMC median remained at 1.9% in March. Assuming the March core PCE print is 0.20%, subsequent monthly readings of only 1.64% annualized would result in core PCE inflation of 2.0%  for 2018. The March CPI report is consistent with our expectation of four rate hikes this year and the story that, given the configuration of inflation, the labor market, and output, the bar has been raised for skipping a  hike at one of the four meetings with press conferences and updated projections. 

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