While consumer prices declined for the first time in 10 months during March, there is increasing evidence that inflation is picking up at both the retail and wholesale levels.

The Labor Department reported Wednesday the Consumer Price Index (CPI) fell 0.1% last month from February, the first and largest falloff since May 2017. However, over the past 12 months this gauge of retail prices showed a gain of 2.4%, its largest hike in a year and stronger than the February year-ago reading of 2.2%.

When volatile food and energy prices are eliminated, the so-called core CPI posted a 0.2% increase in March, the same as in February, while it climbed 2.1% in March from a year earlier, the biggest advance since February 2017.

Nathan Janzen, senior economist at RBC Economic pointed out annual growth in the core CPI is now slightly above Federal Reserve policymakers’ 2% inflation objective while other recent trends have been stronger than that. 

“The 6-month rolling average of month-over-month core CPI growth was 2.6% at an annualized rate in March by our calculation,” he said. “That marks the third straight month at a 2.5% or greater pace.”

Janzen also noted month-over-month increases in an alternative measure preferred by the Federal Reserve has also been running above its 2% inflation objective over the half year to February.  

The good news, Janzen said, is there is still little evidence that inflation is coming unhinged on the upside, but there is also a need for caution.

"Further signs of firming, though, along with ongoing tightening in labor markets, add to the evidence that the economy is operating close to if not somewhat beyond long-run capacity constraints,” Janzen said. “That is fully consistent with the view that, barring some unexpected shock, interest rates will continue to grind higher to gradually withdraw still-accommodative monetary policy conditions.”

This followed the release on Tuesday of a separate report from the Labor Department that showed prices at the wholesale level rose 0.3% in March from the month before, more than analysts’ were expecting, and following a 0.2% gain in February.

This latest gain pushed the Producer Price Index (PPI) higher by 3% over the past 12 months, up from a year-ago level of 2.8% the month before.

The PPI minus food, energy, and trade services rose 0.4% in March, the  same as in both February and January. For the 12 months ended in March, prices for foods, energy, and trade services increased 2.9%, the largest advance since 12-month percent change data were available in August 2014.

The gain in the so-called core PPI led analysts at Wells Fargo Securities to say this “points to the underlying trend in inflation continuing to strengthen” while it noting this translates into a more than 4% annualized growth rate over the past three months.

Stifel Chief Economist Lindsey Piegza said that while producer prices remain elevated, the cost pressures on the production side have yet to translate fully into price increases on the consumer side.

“With the U.S. consumer on still-fragile footing amid disappointing wage gains, any ability for producers to pass on cost increases remains restricted without the risk of losing market share,” she said.

Piegza said, at this point, the Fed remains on sidelines, “waiting for a meaningful gain in prices as exemplified by their preferred measure, the PCE and most preferably in wage gains.” The PCE is the Personal Consumption Expenditures Index, a measure of price changes in consumer goods and services.

She noted some Fed officials remain skeptical of rising inflation given there is, in their words, no “evidence of a meaningful improvement in the underlying trend in inflation, measures of inflation expectations, or wage growth.”