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US inflation eased last month to its lowest level in nearly two years but an uptick in core prices will keep pressure on the Federal Reserve to press ahead with another interest rate increase in May.

The consumer price index for March rose by 5 per cent year on year, according to data published by the Bureau of Labor Statistics on Wednesday.

That marks a significant deceleration compared with the 6 per cent rate recorded in February and is the lowest reading since May 2021. On a monthly basis, consumer prices increased just 0.1 per cent, shy of economists’ forecasts.

However, core CPI, a closely watched measure of underlying price pressures that strips out volatile energy and food costs, rose by 5.6 per cent year on year following a 0.4 per cent monthly jump, suggesting price pressures for some goods and services are still elevated.

The latest inflation data is one of the most important economic releases ahead of the Fed’s next policy meeting in early May. It comes after the March jobs report, released on Friday, showed the labour market is still strong despite a decline in monthly job creation.

So far, Fed officials do not yet appear to have forged a consensus over whether another quarter-point rate rise is necessary before the central bank can call time on its historically aggressive monetary policy campaign to battle high inflation. Some officials believe that a credit crunch in the wake of several recent US bank failures could negate the need for another increase.

Last month most officials backed an additional increase, which would push the federal funds rate above 5 per cent and forecast no cuts until 2024. That, however, is in sharp contrast with current market pricing, which suggests the Fed will deliver one more rate rise next month before reversing course and slashing the federal funds rate this year.

A broad-based drop in energy prices in March and mixed fluctuations in food-related expenditures contributed to a more moderate increase in overall CPI.

Driving the increase in the core measure was a jump in housing-related costs, with the so-called “shelter” index rising 0.6 per cent in March for an annual increase of 8.2 per cent. A 0.5 per cent decline in monthly medical services was offset by a 1.4 per cent monthly gain in transportation services and further gains in recreation costs, personal care services and other categories.

Officials who have indicated support for another rate rise argue that inflation is still far too high and the economy has repeatedly defied expectations of a marked slowdown. They also argue that credit conditions may not tighten sufficiently following the failures of Silicon Valley Bank and other lenders to enable the Fed to pause at its next meeting.

However, some officials have urged a cautious approach, including Austan Goolsbee, president of the Chicago Fed and a voting member of this year’s policy-setting Federal Open Market Committee.

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