Inflation is up only 0.1% in March and 5% compared to last year, when the Fed's interest rate hikes took hold

key points

The consumer price index rose by 0.1% in March and by 5% from a year ago, below estimates.

Excluding food and energy, the core CPI accelerated by 0.4% and 5.6%, both as expected.

Energy costs fell and food prices were stable. Used car prices have also fallen.

A 0.6% increase in shelter costs was the smallest gain since November, but still drove prices up 8.2% on a year-over-year basis.

Inflation cooled in March as the Federal Reserve's interest rate hikes showed more impact, the Labor Department reported on Wednesday.

The consumer price index, a widely monitored index of the costs of goods and services in the American economy, rose 0.1% for the month against the Dow Jones estimate of 0.2%, and 5% from a year ago against an estimate of 5.1%.

Excluding food and energy, the core CPI rose 0.4% and 5.6% on an annual basis, both as expected.

The data showed that while inflation is still well above where the Fed feels comfortable, it is at least showing continued signs of slowing. Policymakers aim for inflation around 2% as a healthy and sustainable growth level. The headline increase in the consumer price index was the smallest since June 2021.

A 3.5% drop in energy costs and an unchanged food index helped keep headline inflation under control. Food at home fell 0.3%, the first decline since September 2020, although it is still up 8.4% from a year ago. Egg prices, which had soared, fell 10.9% this month, putting the 12-month increase at 36%.

A 0.6% increase in shelter costs was the smallest gain since November, but still drove prices up 8.2% on a year-over-year basis. Shelter makes up about a third of the weight in the CPI and is closely watched by Fed officials.

Stock market futures rose sharply while Treasury yields fell following the report. Markets still priced in a 65 percent chance of a final 0.25 percentage point rate hike at the Fed's May meeting, though that was slightly lower than on Tuesday, according to CME Group.

Without shelter, the CPI rose 3.4% from a year ago, according to Jeffrey Roach, chief US economist at LPL Financial.

"As the economy slows, consumer prices will slow further and should bring inflation closer to the Fed's long-term goal of 2%," Roach said. "Markets are likely to react positively to this report as investors gain more confidence that the Fed's next meeting may be the last meeting in which the committee raises the Fed funds target rate."

Used car prices, a major contributor to the initial spike in inflation in 2021, fell another 0.9% in March and are now down 11.2% year over year. The costs of medical care services also decreased by 0.5% per month.

Over the past year or so, the Fed has raised its benchmark interest rate nine times to a total of 4.75 percentage points, the fastest rate of tightening since the early 80s. Officials initially dismissed inflation as transitory, expecting it to fall as factors related to the pandemic subsided, but had to adjust as price increases proved more durable.

One key area that the central bank has targeted is the labor market. A lack of workers helped raise wages and prices, a situation that has eased somewhat in recent months.

In March, nonfarm payrolls rose 236,000, the smallest gain since December 2020, and average hourly earnings rose at an annual rate of 4.2%, the slowest level since June 2021.

The Fed hopes that it can calibrate policy so that the slowdown it is trying to engineer in the labor market does not lead the economy into recession. Gross domestic product growth was tracking at a 2.2 percent annual pace in the first quarter, according to data from the Atlanta Fed, although many economists expect a contraction later this year.