By Geoffrey Smith
Investing.com -- U.S. inflation hit a new 40-year high of 8.5% in March, as sharp rises in prices for gasoline, housing and food all heaped pressure on the Federal Reserve to tighten monetary policy.
The consumer price index rose 1.2% on the month, in line with analysts' expectations, over half of which was accounted for by an 18.3% increase in gasoline prices. Pump prices hit all-time highs last month, according to the American Automobile Association and have only partly receded in the last month as the Biden administration released millions of barrels from the U.S. Strategic Petroleum Reserve to bring prices down. The AAA's average gas price stood at $4.09 a gallon on Monday, down from a peak of $4.33 a month ago.
Gas prices weren't the only thing pushing inflation higher, however. Food costs rose another 1.0% for the second month in a row, and transportation services (which include airfares) rose a seasonally-adjusted 2.0% on the month.
There was a glimmer of light on the horizon, in as much as core prices - which strip out volatile food and energy costs - rose only 0.3%, a little less than the expected 0.5%. The annual core rate of inflation consequently rose only to 6.5%, rather than the 6.6% expected.
In addition, there was fresh evidence that some of the outlandish movements in prices caused by the pandemic and ensuing supply chain constraints are now reversing. Used car prices, which had spiked last year as manufacturers were left unable to produce new ones due to component shortages, fell 3.8%, their second straight monthly drop. They're still up over 35% year-on-year however.
Analysts have estimated that headline inflation may have peaked in March as the base effects from 12 months ago become more favorable. However, the specter of supply chain disruption hasn't disappeared. Ford (NYSE:F) and General Motors (NYSE:GM) have both had to idle plants in Michigan in the last month due to ongoing shortages, and Covid-19 lockdowns in China are affecting an ever-wider circle of businesses. Analysts at Nomura estimate that over 370 million Chinese in 45 cities are currently subjected to some form of restrictions. That includes a near-total lockdown of Shanghai, home to China's biggest port.
Despite that, financial markets were eager to jump on anything offering hope of relief from what is likely to be the most rapid tightening of U.S. monetary policy since 1994. By 8:55 AM ET (1255 GMT), S&P 500 Futures were up 27 points, or 0.6% from immediately before the release, adding to overnight gains. The yield on the two-year U.S. Treasury note, meanwhile, fell 8 basis points to 2.43%, its sharpest drop in nearly seven weeks.