U.S. Consumer Prices Trail Estimates, Testing Powell's View

(Bloomberg) -- A key measure of U.S. consumer prices rose by less than expected in April on lower used-car and apparel costs, testing the Federal Reserve’s message that muted inflation will prove transitory while giving President Donald Trump more ammunition to argue for an interest-rate cut.

The core consumer price index, which excludes food and energy, rose 0.1% from the prior month, missing estimates, and 2.1% from a year earlier as forecast, according to a Labor Department report Friday. The broader CPI rose 0.3% monthly and 2% annually, with both figures less than projected.

The data suggest a sustained pickup in inflation may remain elusive for some time despite the lowest jobless rate in 49 years and consistent wage gains. However, prices could get a boost in coming months after Trump increased tariffs on Chinese imports Friday.

Trump tweeted 31 minutes after the inflation report that the CPI was “really good, very low inflation! We have a great chance to ‘really rock!”’ The president has pressured the Fed for a reduction in interest rates to supercharge the economy amid muted inflation, even as the tight labor market has raised wages and lowered unemployment.

The 10-year Treasury yield briefly slipped to a session low after the CPI report and fed funds futures showed a slight increase in odds for a 2019 rate cut by the central bank. The dollar fell.

“The Fed tells us it’s transitory, but there’s persistent softness going on that we have to remain watchful of,” said Stephen Gallagher, chief U.S. economist at Societe Generale SA. On the declines in used-car and apparel prices, “both of these are thought to be transitory, but they’re still weighing pretty heavily on the core readings and an outcome is the core reading is pretty low.”

Several other economists said the Fed's preferred core price index, due later this month from the Commerce Department, may show a faster April gain than the Labor Department's core CPI and help validate the Fed's ``transitory'' view. That's because the Fed-monitored gauge includes some items, like portfolio management services, that aren't fully reflected in the CPI and signaled solid gains in components from Thursday's producer-price data.

The three-month annualized change in the core CPI gauge was 1.6%, the lowest in almost two years.

Energy prices climbed 2.9% from the prior month as gasoline prices jumped 5.7%. Food costs decreased 0.1%, while medical care costs were up 0.3%.

At the same time, apparel prices dropped steeply for a second month, falling 0.8% in April after a 1.9% March drop that was the most since 1949. Apparel only accounts for just over 3% of the CPI but a new methodology in March had dragged down the overall index.

What Bloomberg’s Economists Say

“The April CPI data is unlikely to sway policy makers’ assessment of the inflation landscape. The doves will cite the weakness relative to expectations, while the ‘transitory’ camp will point to ongoing weakness in the aforementioned idiosyncratic categories as well as the pickup in the year-on-year rate of change. Nonetheless, given the ‘patient’ mood of Fed officials, both camps will be content to watch and wait for further direction.”
-- Carl Riccadonna and Yelena Shulyatyeva, economists
Click here for the full note.

Fed Chairman Jerome Powell has suggested the too-low inflation will prove temporary as it is driven by “transitory” factors, indicating at his latest press conference that the central bank is not leaning toward either a cut or a hike in borrowing costs.

Fed officials typically focus on the less-volatile core inflation measure to gauge underlying trends. Their separate preferred index -- which is linked to consumer spending tallied by the Commerce Department and tends to run slightly below the CPI -- rose 1.5% in March from a year earlier, below the 2% target, as core prices eased to a one-year low of 1.6%. The April figures are due May 31.

Friday’s report showed used-car prices slumped for a third month, dropping 1.3%, the most since September, while new vehicle prices rose 0.1%, less than the prior month.

Shelter costs, which make up about a third of total CPI, continued to underpin inflation. The index climbed 0.4% for a second-straight month, with owner’s-equivalent rent rising 0.3%.

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• A separate Labor Department report Friday showed how subdued inflation is affecting consumer spending power. Average hourly earnings, adjusted for price changes, climbed 1.2% in April from a year earlier, following 1.3% in March.
• Economists surveyed by Bloomberg had forecast the core gauge would rise 0.2% from the prior month and 2.1% from a year earlier, with corresponding gains of 0.4% and 2.1% projected for the broader index.

--With assistance from Chris Middleton, Benjamin Purvis and Sophie Caronello.

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net;Reade Pickert in Washington at epickert@bloomberg.net

To contact the editor responsible for this story: Scott Lanman at slanman@bloomberg.net

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