Rising Prices: Which Goods and Services Are Driving Inflation?

The rate of annual inflation slowed to its lowest level in almost two years in March, the federal government said Wednesday, and yet rising prices continue to take a hefty toll on consumers' budgets.

The goodish news on inflation is that the Consumer Price Index (CPI) for March increased "only" 5% year-over-year, according to the Bureau of Labor Statistics' latest report. That represented a steep slowdown from the 6% increase recorded in February and marked the slowest pace of annual inflation since May 2021. 

Monthly inflation was even more encouraging, with March CPI rising just 0.1%, vs February's gain of 0.4%. So-called core CPI, which excludes volatile food and energy prices and is a better predictor of future inflation, presented a more mixed picture.

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While the core CPI picture could be more clear, it's fair to say the worst inflation to hit consumers since the late Carter and early Reagan administrations looks to have peaked way back in 2022. 

Which brings us to the less-good news about inflation. Prices are still rising at rates not seen in generations.

Between 2000 and 2020, annual inflation in the U.S. averaged just 2.1%. (Recall that the Federal Reserve's inflation target is 2%.) Perhaps we didn't appreciate it enough at the time, but the first two decades of the 21st century were a sort of goldilocks era for inflation: not too fast and not too slow. 

Just have a look at some of the subcategories in the latest the CPI report to see how much things have changed. Below we highlight the goods and services that are weighing most heavily on folks' finances.

Rising prices: where inflation is hitting hardest

The largest contributor to inflation in March was in housing. No surprise there. The shelter component, which counts sundry costs for keeping a roof over one's head, rose 0.6% last month and 8.2% year-over-year. True, home prices and rents have been in a national downtrend since June 2022, but higher owners' equivalent rent and the fact that the data are backward looking are just a couple of reasons for this CPI component remaining elevated.

Then there's food. Although food inflation also continued to moderate with a flat reading in March vs the prior month, prices rose "a still burdensome" 8.5% year-over-year, notes Sarah House, senior economist at Wells Fargo Economics. 

Drilling down a bit, cereals and bakery products rose 13.6% in March vs the year-ago period, fruits and vegetables prices increased 2.4% and nonalcoholic beverages became 11.3% more expensive since around this time in 2022. 

Prices for food away from home, which includes eating at restaurants and hotels, increased 8.8% over the past 12 months. 

Meanwhile, all energy prices fell 6.4% on an annual basis (after Russia's invasion of Ukraine caused them to spike last year). Gas prices, which fell 17.4%, led the category's decline, but not all energy sources are cheaper than they were a year ago. Most notably, electricity prices rose 10.2% over the past 12 months. 

Elsewhere, a new set of wheels keeps getting more expensive, too.

"New vehicle prices continued to increase, this time by 0.4% after increasing 0.2% in February," notes Raymond James Chief Economist Eugenio Alemán. Even worse, prices for new vehicles jumped 6.1% over the past year.

The bottom line is that on an annual basis, inflation was primarily driven by sharply higher costs for food, shelter, electricity and transportation services. While inflation may be moderating, it will clearly be quite some time before we get back to the good old days of 2% increases.