US Inflation In Negative Territory In March

CPI Worse Than Expected

The latest set of US inflation figures, released on Friday, highlighted the extent of the damage suffered by the US economy under the ongoing coronavirus crisis. March CPI was forecast to come in at -0.3%, down from 0.1% registered in February. However, the data was worse than expected with headline PCI printing -0.4% on the month.

Core CPI was equally disappointing, falling to -0.1% over the month. This was below both the prior month’s reading of 0.2% and the expected reading of 0.1%.

Energy Price Crash Weighing on Inflation

The drop over March reflects the huge shift we have seen in the macro landscape over the month. With energy prices collapsing and unemployment surging, inflationary pressures in the US have evaporated.

Indeed, the breakdown of the data showed that declines in the energy component the main driver of the drop. Energy prices were seen falling 5.8% over the month. This was followed by a decline in transport costs (-2.9% on the month) and apparel (-2% on the month).

In terms of upside contributions, tobacco prices saw the biggest increase of 1%. This was followed by a 0.4% rise in medical care costs and a 0.3% rise in food prices. The services sector registered weak inflation also falling 0.1% on the month to an annual reading of 2.1%. This was versus the 2.4% seen in February.

Looking ahead, the outlook for US inflation remains heavily subdued. Given the ongoing lockdowns across the country along with the continued slide in energy prices, there is very little upside threat for inflation here.

Joblessness Rising

The latest unemployment claims data released last week showed nearly 17 million US workers claiming joblessness. With lockdowns set to continue over the month, this figure is likely to continue to rise. This will put further downward pressure on inflation.

This comes at the same time as the Fed is initiating unprecedented easing operations which are again weighing on inflation expectations. The main risk here is of the US falling into a deflationary spiral if the Fed’s easing activities end up prohibiting inflation from recovering once the lockdowns are ended.

USD Index Falls Back Below 100

The US Dollar Index has fallen back lower over the last week. Following a spike above the 100 level in March, DXY has now fallen back below the level and back under recent structural support at the .9968 level. While below here a further move lower is likely with focus on the bull channel low as the next key support.