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US: March consumer prices post first drop in 10 months

CPI slips 0.1%; underlying inflation continues to firm amid rising prices for healthcare and rents

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US consumer prices fell for the first time in 10 months in March, weighed down by a decline in the cost of petrol, but underlying inflation continued to firm amid rising prices for healthcare and rental accommodation.

Washington

US consumer prices fell for the first time in 10 months in March, weighed down by a decline in the cost of petrol, but underlying inflation continued to firm amid rising prices for healthcare and rental accommodation.

The drop in the headline monthly inflation reading reported by the Labor Department on Wednesday is likely temporary, with producer prices increasing solidly in March.

In addition, the tightening labour market is expected to start generating significant wage inflation in the second half of the year. As such, many economists believe the Federal Reserve will raise interest rates three more times this year.

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The US central bank increased borrowing costs last month and forecast at least two additional rate hikes in 2018.

"US inflation is warming up rather than heating up," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "Still, the upward trend could suffice to nudge the Fed three more times this year."

The Consumer Price Index (CPI) slipped 0.1 per cent last month, the first and largest drop since May 2017, after climbing 0.2 per cent in February, the Labor Department said.

In the 12 months through March, the CPI increased 2.4 per cent. That was the largest annual gain in a year and followed February's 2.2 per cent increase. Annual inflation is rising as the weak readings from last year drop from the calculation.

Excluding the volatile food and energy components, the CPI climbed 0.2 per cent, matching February's increase. The so-called core CPI rose 2.1 per cent year-on-year in March, the largest advance since February 2017, after increasing 1.8 per cent in February. The core CPI is now well above the 1.8 per cent annual average increase over the past 10 years.

Economists had forecast the CPI unchanged in March and the core CPI rising 0.2 per cent.

The Fed tracks a different index, the personal consumption expenditures price index (PCE) excluding food and energy, which has consistently run below the central bank's 2 per cent target since mid-2012.

The US dollar was trading slightly lower against a basket of currencies while prices for US Treasuries were up. US stock index futures were weak.

Inflation is also expected to get a boost from a US$1.5 trillion income tax cut package and increased government spending, as well as a weakening US dollar. Economists expect the core PCE price index will breach its target sometime this year.

Petrol prices tumbled 4.9 per cent in March, the largest drop since last May, after falling 0.9 per cent in February. Food prices edged up 0.1 per cent after being unchanged in February.

The core CPI was lifted by rising rents and healthcare costs. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 per cent last month after climbing 0.2 per cent in February. REUTERS