U.S. consumer prices rose a smaller-than-expected 0.1 percent in March as a record drop in natural gas prices offset a rise in airline fares and medical care costs. Stocks and bonds surged on this evidence that inflation remains tame even as the economy continues to expand.
“It’s good news for bonds, good news for stocks and good news for the economy,” making it harder for the Federal Reserve to justify another interest rate increase at its next policy meeting May 20, said Tom Carpenter, chief economist at ASB Capital Management in Washington.
The Dow Jones Industrial Average soared more than 135 points to close at 6,587.16, while the Treasury’s benchmark 30-year bond rose a full point, pushing down its yield more than 8 basis points to 7.08 percent.
The fall in energy prices was the big news in the Labor Department’s March report on the consumer price index. Natural gas prices declined 4.2 percent, the biggest drop recorded. Food prices were unchanged from a month earlier, and transportation costs barely budged, even though the government reinstated a 10 percent tax on domestic airline fares at the start of the month.
That helps explain why the closely watched core rate of the consumer price index, which excludes food and energy costs, rose a smaller-than-expected 0.2 percent in March, Labor Department figures showed. Analysts had expected a 0.3 percent increase in both the CPI and the core rate.
For the first three months of the year, consumer prices rose at a 1.8 percent annual rate, down from a 4.0 percent rate in the first three months of 1996. The core rate rose at a 2.4 percent annual rate for the first three months, down from a 3.0 percent rate during the first quarter last year.
In a separate report Tuesday, the Labor Department said U.S. workers’ average weekly earnings rose just 0.1 percent last month, after posting a revised 2.3 percent rise in February and a 1.8 percent drop in January. The numbers, which are adjusted for inflation and seasonal variations, suggest there’s still little evidence of a rapid buildup in labor costs, as some U.S. central bankers fear.
Also Tuesday, the Commerce Department said total business inventories rose 0.3 percent in February as sales jumped 1.4 percent, another indication that companies are counting on consumer demand staying strong. A month earlier, inventories rose 0.4 percent while sales advanced 1.2 percent.
Meanwhile, a survey from the National Association of Home Builders suggested housing construction may fall in the months ahead due to the Fed’s decision to boost borrowing costs by raising the overnight bank lending rate for the first time in two years on March 25. The NAHB’s housing market index declined 2 points to 56 in April.
Tuesday’s CPI report did contain one warning sign: Health care prices rose 0.4 percent last month, the largest such increase since it rose by a similar amount in December 1995.
Subscribe to the Morning Review newsletter
Get the day’s top headlines delivered to your inbox every morning by subscribing to our newsletter.