U.S. core inflation portends further interest hikes and economic downturn

U.S. consumer inflation eased in March, with less expensive gas and lower food prices providing some relief to households that have struggled under the weight of surging prices for nearly two years, as stated by the Associated Press today.

Consumer prices rose just 0.1% from February to March, down from 0.4% from January to February and the smallest increase since December. Measured from a year earlier, prices were up just 5% in March, down sharply from February’s 6% year-over-year increase and the smallest rise in almost two years.

That said, so-called core inflation remains stubbornly high. The Fed and many private economists regard core prices as a better measure of underlying inflation. Core prices rose 0.4% from February to March and 5.6% from a year earlier, due to price increases in the economy’s vast service sector, the cost of housing, including rents, and wage growth (although that has slowed steadily in the past year).

Current trends are widely expected to lead the Fed to raise its benchmark interest rate for a 10th straight time when it meets in May. The risk is that ever-higher borrowing rates can weaken the economy so much as to cause a recession and the loss of millions of jobs.

Moreover, economists expect growth to slow in the United States later this year in part because turmoil in the banking sector may cause banks to restrict lending, creating issues both nationally and overseas. Many smaller banks have lost customer deposits to huge global banks that are perceived to be too big to fail. The loss of those deposits will likely mean that those banks will extend fewer loans to companies and individuals. Some small businesses say they are already having trouble getting loans, according to a survey by the National Federation for Independent Business.