Truflation: US Inflation Update  March 2024

Executive Summary 

Inflation is still not going away and we expect to see a continued upward trajectory in March, with the increases recorded across 70% of the relative importance categories. This is coupled with strong economic growth expected in Q1 (The Atlanta Federal Reserve forecasts GDP growth of 2.8%) driven by healthy consumer spending. And although consumers continue to take on more debt, they are benefiting from a boost in tax refunds and government spending. 

In March, the economy unexpectedly added 303,000 new jobs, while the unemployment rate fell to 3.8% from 3.9% the previous month. This, coupled with wage growth continuing to outstrip inflation (albeit at a marginally cooler rate than previous months), still bodes well for the economic outlook.

The stickiness in inflation is now also being driven by supply constraints, which are, in turn, driven by commodity markets and geopolitics. This is not only causing core prices to rise, especially transportation, but also inflation in non-core categories, which include volatile food and utilities.

The indications are that prices will remain elevated, with drivers similar to what we saw in the 1970s. In March, the markets are predicting that CPI-U will come in between 3.2%, and 3.6% while Truflation is expecting CPI as reported by BLS to come in at 3.4%.

The key highlights from the March Inflation Report are:

• Prices of Goods and services have increased consistently across the board, with only 30% of the relative importance categories seeing a decline.
• Gasoline is on the rise again due to increasing oil commodities prices and represents the largest month on month (MoM) increase, on top of strong growth in February. 
• Housing prices continue to rise, especially in the owned category. With elevated mortgage rates and continued supply shortages, the housing affordability crisis will persist.
• Downward movement was driven primarily by vehicle purchases (new and used), increased competition in the cellular phone market, and electricity.
• Despite inflation coming down over the past few months, it is important to note that if we look back to January 2020, we have seen a cumulative impact of 24.3%. 

The question we posed last month remains: why would the Federal Reserve need to cut interest rates and drive economic growth when the US economy is already so strong? Markets are seeing a stellar start to the year and the labor market remains tight. As such, an interest rate cut before the summer is very unlikely.

Recent Inflation Trends

Inflation has not been cooling and in fact has seen a reversal of trends. In March, this upward movement is expected to continue and reinforce the Truflation position of continued sticky inflation.

Sticky inflation has been consistently reported by both the PCE and BLS. However, most recently, the Purchasing Managers Index (PMI) has reinforced the outlook that this is likely to continue and be driven by consumer demand. The PMI highlights that economic activity in the manufacturing sector expanded in March after contracting for 16 consecutive months.

The March PMI number registered 50.3%, up 3.5 percentage points from the 47.8% recorded in February. New orders moved back into expansion territory, backlogs contracting, production expanding and exports/imports growing. This has led to prices finally increasing.

This first instance of expansion since September 2022 shows that demand is likely at the early stages of recovery with clear signs of improving conditions for the manufacturing industry. Performance continues to defy projections for a downturn in activity and, with demand currently strong, we expect to see orders and production pick up in the second quarter.

This will no doubt continue to fuel growth in the prices of goods (which includes food) now and in the future. Coupled with prices of services holding relatively stable in March, it is going to be tough to bring inflation down to the Fed’s 2% target.

Strong wage growth continues with employment opportunities being healthy and initial unemployment claims holding relatively stable. This strength in the employment market is likely to keep the cost of services stubborn for some time and will remain at the heart of the Fed’s fight against inflation.

Graph 1 – Truflation Core Inflation Measures (Core, Goods vs Services)

Core inflation holds steady in March, with the rate of monthly increases slowing down from January’s 0.5% MoM and February’s 0.7% MoM to 0.1% MoM in March. While this remains a key focus that must be addressed to bring inflation down, we are seeing non-core prices accelerating significantly with food prices on the rise again.

Over 70% of the category contributions are experiencing upward movement of inflation (driven by the major categories of housing, transportation, food and household durables) compared to only 30% of the categories contributing to relative importance applying downward pressure on inflation. The growth is not only affected by the services element, but also by goods inflation, which increased 0.64% MoM.

Some sort of economic slowdown will be required to address structural inflationary pressures and bring inflation down to the Fed’s 2% target. In particular, we need to see further softening in the labor market for prices in the services sector to cool.

With incomes continuing to outpace inflation, consumers have accelerated their spending again in March. In addition, the savings rate has declined from 4.1% in January to 3.6% in February. This continues to remain well below the average.

Consumer spending remains strong and has increased to $19.2 trillion in February 2024, which is a 4.9% increase year-over-year (YoY). This also represents a 0.7% MoM increase in February and has accelerated from January’s increase of 0.21% MoM. Combined with Monthly Retail Sales increasing 0.58% MoM in February compared to a -1% MoM decline in January, this reinforces the position of strengthening consumer demand which is likely to fuel economic expansion.

Consumer confidence has improved again this month with Truflation’s Consumer Sentiment Index recording a marginal increase from 92.94 to 93.74. However, pricing concerns remain top of mind for consumers, especially with food prices continuing to increase. Consumer expectations (which measure current conditions) remain strong and are no doubt driven by a continued tight labor market and the strength of the stock market.

With this improvement in confidence, the index increased 0.9% MoM in March, following a -4% MoM decline in February. This means we are likely to see consumer demand continue to drive GDP growth.

Graph 2 – Truflation Consumer Confidence Trends

With this in mind, we are starting to see some changes in price drivers. During the pandemic, inflation was largely driven by supply constraints, which have since eased and been replaced by demand. The recent surge in prices looks to be increasingly driven by a combination of demand and geopolitical constraints on supply.

Last month we spoke about stagflation (inflation growth coinciding with economic stagnation). This month, we are continuing to see inflation rising. This is being driven by increased commodity prices and geopolitical events, with Q1 economic growth expected to come in at 2.8% according to the Atlanta Fed’s GDPNow model. This is the same number the St Louis Fed is predicting.

 Graph 3: Category Percentage Contributions to Truflation CPI

With this in mind, March’s most significant upward contributions to inflation came from petrol, owned housing and clothing. Meanwhile, vehicle purchases, cellular phone services and electricity were once again the biggest downward contributors.

Categories applying continued upward pressure on inflation

The main upward drivers of inflation in March continued to come from petrol, owned housing and clothing due to supply constraints and growing demand.

Petrol prices continued their rise and were again the single biggest contributor to inflation on the upside with a 6.35% MoM rise in March. This, as expected, was driven by the continued growth in crude oil prices since the middle of December and reached $85.69 per barrel on April 2. On top of the 3.86% MoM increase recorded in February, the YoY number has also reversed to a positive movement of 0.31%.  

Graph 4: Price of WTI Crude Oil per Barrel

US$85.69 for April 2, 2024

Data Source: Weekly Petroleum Status from the Energy Information Administration

The ongoing geopolitical uncertainty, especially in the Middle East, as well as speculation of falling Mexican oil supply in the near future, has driven an increase in prices. Oil markets are also seeing the effects of the OPEC+ countries extending voluntary cuts for the second quarter of the year last month. Coupled with the better-than-expected US PMI, this will, in turn, accelerate commodity prices due to expected demand increases in Q2.

Housing is another significant upward inflation driver, recording a 0.4% MoM increase in March, though this marks a deceleration compared to February’s 0.9% MoM growth. Annual inflation in this category has marginally dropped from 4.2% in February to 3.6% YoY in March. 

The category continues to see mixed results with prices of rented lodgings holding relatively stable and other lodgings prices rising 3.7% MoM in March, as business travel continues to accelerate. Meanwhile, owned housing, which contributes 13.8% of household expenditure, recorded increases in March of 0.39% MoM and 5.36% YoY. However, it must be said that these growth rates are cooling, compared to February’s 1% MoM and 5.8% YoY.

National average 30-year mortgage rates have been holding relatively stable (according to Freddie Mac) and sat at 6.79% as of March 28. Without a consistent and wider consensus on what will happen next with inflation, it is difficult to see mortgage rates post a meaningful and sustained pullback from current levels. Fannie Mae has raised its full-year outlook and is now expecting mortgage rates to be at 6.4% by the end of 2024, compared to their prior forecast of 5.8%. With the Fed likely holding interest rates at least until the summer, we are unlikely to see any shift before then.

The most recent new residential home sales highlighted a 5.9% growth YoY in February while monthly sales have remained stable for three consecutive months and reported a -0.3% MoM decline in March. Compared to existing home sales, which account for roughly  80% of all home sales, this category registered a significant uptick of 9.5% MoM according to the National Association of Realtors (NAR). In addition, the median price of existing home sales was at $384,500, very much on the low side of the last 10 months. This suggests consumers are starting to take advantage of the lower price points to purchase existing homes.

Unsold existing homes at the end of March increased 5.9% MoM to 1.07 million, or the equivalent of 2.9 months’ supply at the current monthly sales pace. This is marginally lower than the 3-month supply in January and remains a key concern since inventory must reach 4-6 months of supply to ease the rise in housing prices.

Additionally, new residential construction levels remain below historic averages, especially if we consider the population growth in the US since 1999. The number of new residential home permits yet to begin construction started the year at -1.9% MoM, while new residential starts were up 10.7% MoM and new residential completions were at 19.7% MoM. This might be an early indication of supply returning to the market and helping to resolve inventory levels, but we remain below historic averages.

Graph 5: Housing Supply: New Residential Permits, Starts and Completes in 000s of Units

Source: US Census Bureau / New Residential Construction Report (all in 000s of Units)

High mortgage rates and house prices, coupled with historically low housing stock, continue to put homeownership out of reach for many. This is most notably an issue for first-time buyers who remain pessimistic about being able to afford a home.

The final main upward driver of inflation in March was apparel which increased 2.3% MoM and 0.2% YoY in March. According to the Retail Monthly Sales by the Census Department, we see that apparel sales declined in February with a -0.4% decline MoM but still registered 1.3% growth YoY. This is not too surprising, given the increased prices driven by retailers applying fewer discounts and effectively managing their inventory levels. At the same time, manufacturers are trying to drive greater premiumization as new season fashions enter the market. 

Categories applying downward pressure on prices

In March, three main categories contributed to the downward inflation trend: vehicle purchases, cellular phone services and electricity.

Despite the transportation category as a whole recording a significant MoM growth of 0.8% and 1% YoY, it was a mixed bag. Within this, petrol and public transportation registered significant increases while other vehicle expenses and vehicle purchases (new and used) applied downward pricing pressure. Vehicle purchases (new and used) account for 9.1% of household expenditure and recorded a -0.1% decline MoM and 6.59% YoY growth in March.  

The good news is there seems to be some light at the end of the tunnel for this category, with demand for new and used cars strengthening. This is peak auto sales season, with sales picking up and inventory levels accelerating at the same time.   

Graph 6: Motor Vehicle and Parts Dealers in $ Millions: Adjusted Sales and Inventories

Source: US Census Department: Advance Monthly Retail Trade Survey

This marginal improvement in demand, combined with sustained high financing interest rates, is likely to place downward pressure on vehicle prices. As inventory levels build up for the peak season, the upcoming months will be critical. However, with new models and vehicles coming to market, we might still see higher price points.

Communications is the second category seeing mixed results, with the overall category experiencing a -0.02% decline MoM and -2.2% decline YoY. Residential phone services continue to see upward movement in prices as they continue to progress with infrastructure upgrades. However, it is the cellular phone category, accounting for 2.7% of household expenditure, that is contributing to the overall downward movement, with a -0.2% decline MoM and -3.1% decline YoY. This is driven by increased price competition amongst the providers and consumers seeking to get more for less, which is the opposite of shrinkflation.

The other main category that has exerted downward pressure on inflation is electricity with a -0.1% decline MoM and -0.6% decline YoY in March. This has been driven by various factors, including the prices of commodities like natural gas and heating oil coming down, increased supply and weather adjustments. As we come into the spring season we expect demand for electricity to ease comparatively to the winter months. This will have an impact on the prices that households pay. 

Higher rates for longer 

The economy started the year strong, with a tight labor market, strengthening consumer confidence and healthy consumer spending. However, the one factor causing concerns is that inflation recorded an upward trajectory for the second month in a row. This is fuelling speculation that we are not yet close to taming inflation.

There are a number of pillars that we believe will keep inflation elevated and make it challenging for the Fed to meet its 2% target. This will no doubt have an impact on the Fed's decision to reduce interest rates. These pillars include:

• The labor market has remained tight combined with wages continuing to increase at a faster rate than inflation.  
• Government fiscal spending during the onset of the pandemic resulted in accelerated spending and additional incentives which drove inflation.
• De-globalization and on-shoring, while great for innovation and employment opportunities, still result in higher cost bases and increased prices.
• Geopolitical issues, such as the Red Sea conflict increasing transportation costs and the Ukraine war raising oil and food commodities prices.
• Population growth has accelerated and will no doubt continue to apply pressure on shelter costs in particular.

What does this mean for interest rates? Current market expectations, as reported by the CME FedWatch Tool, is that 50% expect a 25 basis point reduction in June but 70% expect the first drop in July. Truflation expects the Central Bank to hold its relative position longer than anticipated. This is certainly reinforced by consumer-based inflation expectations surveys from the University of Michigan and the New York Fed, which represent the sentiment of American households. This data reveals that consumers expect inflation to come in at just above 3% on a one-year horizon, marking an increase compared to last month as consumers show less optimism that inflation has been tamed.

Graph 7: Consumer Inflation Expectations (2% is the Fed Target)

 Source: Federal Reserve Bank of New York & University of Michigan

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 14 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with four predictions spot on and all but one deviating by no more than 20 basis points since coverage was initiated.

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APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on March 2024