Prices are moving in a more palatable direction for US consumers.

Annual inflation, as measured by the Consumer Price Index, dropped in March for the ninth consecutive month. And for the first time since September 2020, grocery prices fell on a monthly basis.

Prices rose 5% for the 12 months ended in March, down from 6% in February, the Bureau of Labor Statistics reported Wednesday. Annual CPI plunged to its lowest rate since May 2021, helped by year-over-year comparisons to a period when food and energy prices spiked amid Russia’s invasion of Ukraine.

Still, CPI showed some cooling on a monthly basis. The index, which measures price changes over time for a basket of goods, ticked up 0.1% from February, as compared to a previous 0.4% increase.

Shelter costs, which tend to reflect lagging data, were the largest contributor of the monthly gain, offsetting sharp declines across energy categories, according to the BLS.

The food at home index dropped 0.3% for the month, helped by lower prices for eggs (which fell nearly 11%) and fruits and vegetables (which declined 1.3%). The broader food category was unchanged (0%) for the first time since November 2020.

Economists were expecting an annual increase of 5.2% and a monthly gain of 0.2%, according to Refinitiv.

“It’s a good print, but it’s not the end of the game, it’s not the end of the story,” Erik Lundh, principal economist at the Conference Board, told CNN. “There’s more to come — hopefully, knock on wood — and we’re heading in the right direction.”

Stripping out the often-volatile components of food and energy, core CPI grew 0.4% for the month, resulting in a 5.6% annual growth rate. In February, core CPI accelerated 0.5% month on month and 5.5% year over year.

“On the surface, price pressures are lessening. But when the box is opened, [core inflation] accelerated to the highest rate since May 2021,” economist Sung Won Sohn, president of SS Economics and Loyola Marymount University professor, said in a statement. “This is well over the 2% target set by the central bank.”

He added: “More hikes in the interest rate are coming.”

CPI is one of the major inflation gauges that’s being watched like a hawk by the Federal Reserve, which is in the throes of a yearlong campaign to battle inflation through monetary tightening and stark interest rate hikes.

Base effects in play

The 1 percentage point drop in headline CPI is the largest downward swing seen in more than eight years; however, that feat was accomplished largely due to last year’s inflation spike.

“Inflation really started to take off last spring and through June,” Mark Zandi, chief economist of Moody’s Analytics, told CNN. “And so things are going to feel a lot better here in the next few months because of those base effects.”

Because month-to-month changes can be volatile, even in spite of seasonal adjustments, year-over-year comparisons typically can help smooth out some of that jumpiness.

But times have been anything but typical for the past three years. So, for the months ahead, moving averages become all the more critical to observe, Lundh said.

While the picture is more clear for the trajectory of headline CPI, it’s a little more opaque for core and “supercore” activity (core services, excluding housing), Zandi said.

The base effects are much less pronounced for core CPI, because the spring and summer inflation spike was driven by food, energy and goods prices.

“Core inflation is remaining more persistent,” he said. “I expect improvement really toward the middle and second half of the year when the cost of housing services really begins to slow.”

Shelter costs, as measured in the CPI, tend to lag more than other categories as the BLS collects rent data every six months and most rents don’t change too frequently. Private-sector data shows that apartment rents have fallen in recent months, suggesting an eventual cooldown in shelter prices will show up in the CPI.

Stripping out housing, however, still leaves a “supercore” inflation measurement that has remained stubbornly high.

“Supercore correlates with wages; thus, the Fed would be looking at some relief in this metric as a sign of slower wage gains,” Gary Pzegeo, head of fixed income at CIBC Private Wealth US, said in a statement. “Today’s report shows the supercore decelerated in March, but it remains a sticky component of inflation, running around +4% annualized on a three- and six-month basis.”

“This is too fast and a sign that the labor market remains offsides,” he added.

More Fed rate hikes still on the horizon

The March CPI trajectory doesn’t take another rate hike off the table, Lundh said.

“There was some encouraging news in the inflation data today, but I don’t think it’s sufficient to cause the Fed to pause,” he said. “So we’re expecting to see a [quarter-point] hike in the May meeting and even potentially another hike following that.”

The Fed’s fight grew more complex in March with the collapse of two regional US banks, which then caused turmoil in the financial industry. The Fed, the Treasury Department and the Federal Deposit Insurance Corporation stepped in to shore up depositors and prevent future bank runs.

However, there are expectations that the turmoil could mean future credit tightening, which in turn could dampen demand and even help the Fed in its inflation-fighting goals. However, it could also create more uncertainty about a future recession.

“The CPI is backwards looking and the Fed still has to consider how much of a credit crunch to factor into the economy,” said Gina Bolvin, president of Bolvin Wealth Management, in a statement.

While inflation has moderated since reaching a decades-high level last summer, the pace has been slower than anticipated as a strong labor labor market and resilient consumer spending has continued to fuel economic growth.