WASHINGTON — Consumer inflation rose 5 percent in March over the prior year, the government said Wednesday, down from the 6 percent recorded in February. The March increase was the lowest in almost two years, but high enough to suggest that the Federal Reserve will raise interest rates at its next policy meeting in May.  

On a monthly basis, the inflation numbers show that less expensive gas and lower food prices are providing some relief to households that have struggled under the weight of surging prices for nearly two years.

Consumer prices rose just 0.1 percent between February and March, down from 0.4 percent between January and February and the smallest increase since December. Prices fell for goods like gas, used cars, and furniture which had soared a year ago after Russia’s invasion of Ukraine.

Excluding volatile food and energy costs, though, so-called core inflation is stubbornly high. Core prices rose 0.4 percent from February to March and 5.6 percent from a year earlier. The Fed and many private economists regard core prices as a better measure of underlying inflation.

Price increases in the economy’s vast service sector — ranging from rents and restaurant meals to haircuts and auto insurance — are keeping core inflation high, at least for now. That trend is widely expected to lead the Fed to raise its benchmark interest rate for a 10th straight time when it meets in May.

Fed officials have projected that after one additional quarter-point hike next month — which would raise their benchmark rate to about 5.1 percent, its highest point in 16 years — they will pause their hikes but leave their key rate elevated through 2023. 

Yet the officials have cautioned that they could raise rates still further if they deem it necessary to curb inflation.

When the Fed tightens credit with the goal of cooling the economy and inflation, it typically leads to higher rates on mortgages, auto loans, credit card borrowing and many business loans. 

The risk is that ever-higher borrowing rates can weaken the economy so much as to cause a recession.

On Tuesday, the International Monetary Fund, a 190-nation lending organization, warned that persistently high inflation around the world — and efforts by central banks, including the Fed, to fight it — would likely slow global growth this year and next.

Even so, there are signs that inflation pressures will ease in the months ahead. One reason inflation could decline is that economists expect growth to slow in the United States later this year, in part because turmoil in the banking sector may cause banks to restrict lending.

The Fed’s year-long streak of rate hikes are also starting to cool a hot labor market, with recent data showing that companies are advertising fewer openings and that wage growth has been slowing from historically elevated levels.

The biggest driver of core inflation is likely the cost of housing, including rents. They are rising at an annual pace of about 9 percent, according to the government’s figures.

Still, Apartment List, which tracks real-time changes in new leases, shows rents rising at a 2.6 percent pace compared with a year ago. As more apartments reset with those smaller increases, the government’s inflation data should show milder increases in coming months.

The Fed is also focused on the cost of services, which are rising at historically rapid rates. Officials at the central bank have said they believe that raising wages, while good for workers, are contributing to those price increases.

Last week’s March jobs report, though, showed that wage growth has slowed steadily in the past year. Businesses are posting fewer open positions, and the number of Americans quitting their jobs to take new, mostly higher-paying work — a driver of higher pay — is falling.

A more worrisome trend is the possibility that banks will pull sharply back on lending to conserve funds, after two large banks collapsed last month, igniting turmoil in the United States and overseas. 

Many smaller banks have lost customer deposits to huge global banks that are perceived to be too big to fail. The loss of those deposits will likely mean that those banks will extend fewer loans to companies and individuals.

Some small businesses say they are already having trouble getting loans, according to a survey by the National Federation for Independent Business. The IMF said Tuesday that pullbacks in lending could slow growth by nearly a half-percentage point over the next 12 months.

A slowdown in the economy could cool inflation and as a result would help the Fed achieve its objectives. But the blow to the economy might prove larger than expected. Under the worst-case scenario, it could mean a full-blown recession with the loss of millions of jobs.

Associated Press