(Bloomberg). — The U.S.’s inflation surge of last year is being attributed to consumer-goods price increases. However, these prices are cooling as service costs rise.

The March increase in prices for goods, other than food, energy, and used cars, was 0.4%, which is the lowest annual gain. This was partially due to moderately higher prices for new cars, apparel and household supplies.

Core services (which exclude energy) saw a 0.6% increase from one month prior. This is the highest level since Oct 1992. It also reflects a wider reopening the economy after coronavirus restrictions.

Prices for hotel rooms, car rental and medical services saw a rapid increase in price. The biggest monthly increase in airline fares was 10.7%. Shelter costs (which include rents and fees for hotels) accounted for 0.5% of the overall CPI for a second consecutive month.

After months of large-scale increases, Federal Reserve policymakers and economists have been searching for signs that goods inflation is slowing. While March appears to have shown some respite for merchandise, price increases in services are likely to keep inflation well above the Fed’s goal for the remainder of the year, keeping the central bank on track to take a more aggressive policy approach.

“Slower core-goods inflation is partly offset by higher services inflation, underscoring the challenge the Fed faces in taming price pressures even if supply and demand in the goods sector were to balance,” Bloomberg economists Anna Wong and Andrew Husby said in a note. 

“The Fed needs to hike rates expeditiously, but if goods demand continues to cool they may not need to hike as aggressively as the market — now pricing in almost three 50-bps rate hikes this year — currently expects,” they said.

Due to the high number of open jobs and tight labor market, another factor could cause services prices to rise is labor costs. Economists warn that upward pressure on wages could lead to greater price increases for services like medical care, recreation, and dining out. Citigroup Inc (NYSE:). In a note

“This underlying inflationary pressure resulting from a tight labor market could be the most important element keeping the Fed raising rates quickly back towards its estimate of the long run neutral rate,” Citi economists Veronica Clark and Andrew Hollenhorst said.

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