And with inflation on the wane, the Federal Reserve may have leeway to cut rates later this year if an anticipated recession hits.

CPI, which measures changes in prices of a large basket of goods and services, rose 5 percent in March, the smallest year-over-year gain since May 2021.

While down from a peak of more than 9 percent last summer, the rate remains much higher than the roughly 2 percent annual increases we were accustomed to in the years before the pandemic, and is more than double the Fed’s target.

Key details:

  • Food prices advanced 8.6 percent from a year earlier after an average increase of more than 10 percent in the previous 12 months. Prices were unchanged in March from February.
  • Energy costs dropped 6.4 percent from a year earlier, including a 17 percent decline in gasoline.
  • Prices for used vehicles, a big contributor to inflation earlier in the cycle, fell 11 percent over the past year.
  • So-called core CPI, which excludes the volatile food and energy categories, increased 5.6 percent from a year earlier, slightly more than in February. Economists consider core CPI a better measure of underlying inflation.
  • From February to March, CPI rose 0.1 percent, down from February’s 0.4 percent increase, while core CPI gained 0.4 percent, down from 0.5 percent.

“This report leaves little doubt that the disinflationary process is well underway,” said Gregory Daco, chief economist at EY-Parthenon.

Shelter costs — the largest component of CPI, at about one-third of the index — rose 8.2 percent over the year, offsetting the decline in energy prices and other categories. Excluding shelter, CPI rose 3.4 percent over the past year, which underscores how hard it is for inflation to cool down when housing costs remain hot.

But that may be changing.

CPI shelter costs are the Bureau of Labor Statistics’ calculation of rents and what it calls owners’ equivalent rent of residences. Owners’ equivalent rent doesn’t reflect home prices or mortgages, which the government classifies as investments rather than spending, and instead approximates what a homeowner would have to pay in rent.

The rent measure, meanwhile, tracks both new and existing leases, and therefore usually lags about a year behind indexes of new leases only.

New rent increases have fallen dramatically since spiking from the summer of 2021 to the summer of 2022, according to Apartment List, a company that tracks rental prices. Its national rent index rose 2.6 percent in March from a year earlier, down from an average of 4.6 percent in the prior six months and a peak of 18 percent in December 2021.

“Because our index serves as a leading indicator for the housing components of CPI, we expect rent CPI to cool steadily in the months ahead,” the company said on Wednesday.

The Fed has said it expects shelter costs to moderate in coming months, but it is concerned about other cost-of-living items that continue to move higher. Specifically, central bank chair Jerome Powell has pointed to service prices excluding shelter, which jumped 6.1 percent in March from a year earlier.

Despite the positive inflation trends, the Fed is expected to boost its benchmark lending rate by one-quarter of a percentage point, to a range of 5 to 5.25 percent, when it meets early next month. It would be the Fed’s 10th straight increase since it began hiking rates to combat inflation in March 2022.

The Fed’s staff — citing expectation of reduced lending following the collapse of two banks — is anticipating a “mild” recession later in the year, according to notes from the central bank’s March 21-22 meeting released on Wednesday.

If the economy does contract, the Fed’s conventional response would be to lower interest rates to encourage spending and investment. But if consumer prices don’t moderate further, policy makers would be in a bind, loath to cut rates for fear of reigniting inflation.

Mark Zandi, chief economist at Moody’s Analytics, doesn’t see a recession or a return of inflation as likely outcomes.

“Gas prices, rents, and food costs, staples for households, [are] much less of a financial problem than they were just a few months ago,” he said in an e-mail. “I call it a slowcession — no recession, but an economy that’s not going anywhere fast.”

Larry Edelman can be reached at [email protected]. Follow him on Twitter @GlobeNewsEd.

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