Companies are starting to test their pricing power as American households become more confident the economic expansion will be sustained.
The cost of living excluding food and fuel rose 0.2 percent in March for a third month, reflecting broad-based gains in rents, medical care, clothing and used vehicles, a Labor Department report showed Friday in Washington. The University of Michigan said its preliminary consumer sentiment index for April climbed to the second-highest level in more than eight years.
The strengthening labor market that’s supporting confidence also may be prompting companies to charge customers more, easing concern that the jump in the dollar and slump in oil prices would ripple through the economy to push already weak inflation even lower. Federal Reserve policy makers want to see prices on a trajectory toward their 2 percent goal as they weigh the timing of their first interest rate increase since 2006.
“The underlying tone in the economy and the strengthening labor markets are giving you a little bit more core inflation,” said Joe Carson, director of global economic research at AllianceBernstein LP in New York. “Individuals still view the labor market and buying opportunities very favorably. They have strong job gains, strong liquidity.”
Stocks retreated amid a global selloff as American Express Co. tumbled and China tightened trading rules. The Standard & Poor’s 500 Index dropped 1.1 percent to 2,081.18 at the close in New York.
On a year-over-year basis, consumer prices excluding food and fuel climbed 1.8 percent in March, the biggest 12-month advance since October. Over the past three months, so-called core costs were up at a 2.3 percent annualized rate, the most since June, compared with a 1.6 percent increase in February.
Fed officials are monitoring inflation as they seek reasonable confidence that prices are firming toward their 2 percent target. The policy-setting Federal Open Market Committee was split at its meeting last month on the timing of lift-off. Several participants wanted to normalize policy starting in June, while others favored later in the year, according to minutes of the March 17-18 meeting.
The consumer-price index is in line with global data that signal the deflation shock that marked the start of the year is receding as easy monetary policies take hold. Deflation is a prolonged drop in prices that hurts economic growth.
“The risk of that prolonged deflationary episode is diminished,” said David Lipton, the No. 2 official at the International Monetary Fund, which is hosting its spring meetings in Washington this week.
The Labor Department’s index that includes the volatile costs of food and energy also rose 0.2 percent in March from the prior month. Total prices dropped 0.1 percent in the 12 months ended March after being little changed in the year through February.
Costs for medical-care services climbed 0.4 percent in March, the biggest increase since August 2013. The category designed to track the rental value of owner-occupied housing increased 0.3 percent, the most since December 2013. Clothing prices also advanced by the most in over a year, while the gain for used vehicles was the biggest since June 2011.
“The inflation picture is improving, and is at least stable going forward,” said Omair Sharif, a rates sales strategist at Societe Generale in New York. For policy makers, “they’ve got to be feeling better.”
American consumers also are more upbeat. The University of Michigan said its sentiment gauge climbed to 95.9 this month from 93 in March. The median projection in a Bloomberg survey of economists called for an increase to 94.
Households were more upbeat about the economy, their current financial situations and the buying climate, indicating spending will pick up after a lackluster performance in the first quarter. At the same time, households have a dimmer view about their income prospects, meaning shoppers will keep seeking out discounts from merchants.
“The fact that consumers are feeling better hopefully will translate into greater expenditures over time and that’s been a missing link to the economic recovery this year,” said Michelle Meyer, deputy head of U.S economics at Bank of America Corp. in New York.
Disappointing payrolls data were among weaker-than-forecast economic reports since then that have cast doubt on expectations that the central bank will increase borrowing costs in June, making September more likely, according to economists surveyed by Bloomberg.
The sentiment report “is encouraging given that the March payroll report was a little bit weaker,” said Meyer.
Another report Friday showed the index of leading economic indicators rose 0.2 percent in March, less than forecast, indicating the world’s largest economy will have difficulty gaining traction after a first-quarter slowdown.
The increase in the Conference Board’s gauge, a measure of the outlook for the next three to six months, followed a 0.1 percent advance in February that was smaller than previously reported, the New York-based group said.
The index’s “slowing growth rate over recent months suggests weaker growth may be ahead,” Ataman Ozyildirim, an economist at the Conference Board, said in a statement.
Weak price pressures, though, have been helping boost consumer buying power. Average hourly earnings climbed 2.2 percent in the 12 months ended in March after adjusting for inflation, a separate Labor Department report showed Friday.
For Bank of America’s Meyer, there is still a danger that prices will remain subdued.
“With inflation, although today’s report did show a tick higher, we’re still talking about a pretty slow pace of inflation with potential downside risk,” she said, adding that the increase in the dollar and drop in oil prices will take time to filter through to other goods.