Inflation Report Shows Price Pressures Eased in March

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U.S. inflation eased in March to its lowest level in nearly two years, but underlying price pressures likely keep the door open for the Federal Reserve to consider another interest-rate increase at its May meeting.

The consumer-price index, a closely watched inflation gauge that measures what consumers pay for goods and services, rose 5% last month from a year earlier, down from February’s 6% increase and the smallest gain since May 2021, the Labor Department said Wednesday.

Consumers saw lower prices last month for groceries, gasoline, medical care and utilities and high prices for shelter, airline fares and insurance, the department said.

Stocks were mixed and bond yields fell following the inflation report.

Inflation remains elevated—well above the 2.1% average in the three years before the pandemic and the Fed’s 2% target.

Core prices, a measure of underlying inflation that excludes volatile energy and food categories, increased 5.6% in March from a year earlier, accelerating slightly from 5.5% the prior month. Core inflation, which economists see as a better predictor of future inflation, has stayed stubbornly high in part because of inflationary pressures from shelter costs. 

The CPI rose 0.1% in March from the prior month, down sharply from February’s 0.4% increase, while core CPI increased 0.4%, down slightly from 0.5%.

Still-high inflation and a tight labor market likely keep the Fed on track to raise interest rates again, said Steve Blitz, chief U.S. economist at TS Lombard. “The inflation problem doesn’t get solved by itself—it needs higher unemployment to get there.”

The Fed has raised interest rates nine times over the past year to cool the economy and tame inflation, which shot up as the economy rebounded from the pandemic during supply-chain disruptions and labor shortages.

Fed officials in March raised the benchmark federal-funds rate by a quarter-percentage point, bringing it to a range between 4.75% and 5%. Officials have signaled they will pay close attention to measures of economic activity, including lending conditions following banking-system stress, as they weigh whether to raise rates again at an early May meeting.

At their meeting last month, nearly all 18 officials who participated projected that one more rate increase would be warranted this year. Most expect to hold rates steady after that, provided the economy grows little this year and labor demand cools.

The economy started the year with surprising strength but it has shown recent signs of slowing. Tighter lending following two recent midsize bank failures also will slow growth this year, the International Monetary Fund estimated Tuesday.

The labor market cooled some in March, with hiring gains moderating and wage growth easing. Weekly jobless claims, a proxy for layoffs, are up from historic lows. And job openings have dropped—a signal that demand for workers is softening. Consumer spending, the primary driver of growth, rose more modestly in February.

Grocery prices declined in March from the prior month, marking the first one-month drop since September 2020. Egg prices, which soared last year because of an Avian-flu outbreak, posted the biggest single-month drop since 1987. Gasoline and residential natural-gas prices also dropped. New auto prices rose but used auto prices fell. 

Matt LeRoy and his wife, Melanie, cut back on after-school care for their 6-year-old son, and they are driving to visit family for spring break instead of renting an Airbnb in the Poconos. Mr. LeRoy said they saved all of his annual bonus this year, rather than spending part of it on a home-improvement project or purchasing a three-burner gas grill he was looking at.

“We got our deck redone last year, and more than anything I wanted a nice, new grill. But we already have one. And, sure, it’s 10 years old, but it does its job,” said Mr. LeRoy, a senior manager at a healthcare tech company in Simsbury, Conn. “That’s where our heads are at right now—being savvy savers and making sure we’re thinking about the long term.”

The clogging of the supply chain, an early driver of the inflation surge, has abated. Shipping rates from China to the West Coast have dropped close to prepandemic levels after soaring in 2021.

David Cuevas, co-owner of Digital Wardogs, an e-commerce company that sells products through Amazon.com Inc., said that the profit margin is bigger on his business’s main product—shoe-spike attachments for aerating lawns—because of the drop in shipping rates, but that inflation is eating into overall sales as consumers spend more on essential items and travel.

“They’re having to spend more at the grocery store, so you’re not seeing as many of them buying products,” Mr. Cuevas said. “Being able to take a trip rather than buying some object off Amazon is what I’m doing—and I think what a bunch of other people are doing as well.”

Prices for goods have been rising more slowly, a process called disinflation, but that has largely run its course, said Bernard Yaros, an economist at Moody’s. “At least in the near term, a lot of the benefit we’ve gotten from healing supply chains has played out, and we can’t necessarily expect that to be a major source of disinflation going forward,” he said.

Write to Gwynn Guilford at gwynn.guilford@wsj.com