Inflation in focus: Unpacking the March CPI report

In this episode of J.P. Morgan's Making Sense, Senior Research Analyst Maya Crook and Senior Economist Mike Hansen analyze the March CPI report, which revealed a sharp 0.9% monthly rise in headline inflation—driven by an 11% surge in energy prices due to Middle East supply disruptions. Core inflation, excluding food and energy, rose only 0.2%, with no strong evidence of energy price pass-through into services or goods. The discussion highlights that while energy prices remain elevated—tracking above $4.10 per gallon in April—core inflation pressures remain sticky, especially in services like medical care and travel, though medical inflation was softer than expected. The episode also explores the divergence between CPI and the Fed’s preferred PCE measure, attributing it to differences in weighting (especially shelter), idiosyncratic data quirks (like software pricing), and broader coverage in PCE. Looking ahead, the team projects headline CPI to settle around 3.5% and core CPI near 3% for the year, with PCE running slightly higher. Globally, inflation trends mirror the U.S., with energy driving headline increases but core inflation remaining stable. Central banks are expected to remain cautious, with EM central banks more patient due to Fed inaction, while Western Europe may still hike. The Fed’s key challenge lies in balancing inflation risks from sustained energy costs against the growing threat of weakening consumer demand and purchasing power erosion, which could ultimately lead to disinflationary pressures. The episode concludes with a nuanced outlook: inflation remains above target, but the Fed may lean toward rate cuts if consumer demand weakens significantly. Key takeaways include: (1) Energy price spikes are temporary but impactful, with inflationary effects front-loaded; (2) Core inflation remains resilient, but not yet showing clear pass-through from energy or tariffs; (3) The PCE measure is more relevant for Fed policy than CPI due to broader coverage and weighting; (4) Elevated energy costs may reduce consumer spending, creating disinflationary pressure; (5) The Fed’s decision will hinge on the duration and magnitude of the energy shock, not just its level; (6) Global inflation trends are converging, with energy as the primary driver; (7) Tariff impacts on goods prices are likely to persist gradually; (8) Central bank policy divergence reflects regional risk assessments, with EM more patient and Europe more hawkish.