Pause in Inflation Pickup Eases Pressure on Fed for Faster Hikes

(Bloomberg) -- U.S. inflation took a breather in April from its acceleration in recent months, reducing pressure on Federal Reserve policy makers to consider a faster pace of interest-rate hikes.

Excluding food and energy, the core consumer price index was up a below-forecast 0.1 percent from March, the least since November, after 0.2 percent the prior month. The 2.1 percent annual increase was also lower than projected and the same as in March. Dragging down the measures were the biggest monthly drop since 2009 for used cars and the largest decline in airfares in four years.

The dollar and Treasury yields fell, while U.S. stocks rose, after the report suggested inflation isn’t flaring up in a way that policy makers would find troublesome. The figures may support the case of the Fed officials who see three or fewer quarter-point hikes as warranted this year, as opposed to those calling for four. The central bank is still widely projected to raise interest rates in June for the second time this year.

This kind of report “removes a little pressure from the Fed to step up the pace of tightening,” said Sal Guatieri, senior economist at BMO Capital Markets. “We were seeing a ramp-up in inflation in some indicators and it may have made the Fed a little nervous. If that trend continued it would have to move more quickly to normalize.”

At the same time, there are still plenty of forces in the economy that have the potential to boost consumer prices, including higher freight costs, a 17-year low in the unemployment rate and tariffs on imported metals. “We’re hearing increasing stories from U.S. businesses that the only way to manage increasing costs is to pass them on to customers,” Guatieri said. “The trend is pretty clearly in place."

Including all items, the CPI picked up to a 2.5 percent increase from a year earlier after a 2.4 percent gain in March, thanks to rising gasoline prices. That’s the fastest annual rise since February 2017, though the monthly advance of 0.2 percent was less than analysts had estimated.

“This is a pretty soft print with a number of large declines,” said Omair Sharif, a senior U.S. economist at Societe Generale. “There’s no broad-based gain in inflation. It argues for the Fed sticking with the three-rate-hike type of plan.”

While rising gasoline prices are pinching Americans’ wallets, fuel is providing only a modest boost to the broad CPI,.

The core CPI reading brought the three-month annualized gain to 1.8 percent, the lowest since July, after 2.9 percent.

The shelter category rose 0.3 percent from the prior month after a 0.4 percent gain. Owners-equivalent rent, one of the categories designed to track rental prices, advanced 0.3 percent. Hotel and motel rates, which had posted an outsize gain in March, rose 0.8 percent in April.

What Our Economists Say

While market participants continue to scour the economic landscape for evidence that above-trend growth and below-neutral unemployment are fostering firmer price pressures, the April CPI results will provide only modest supporting evidence in this regard. Both core goods and service-inflation trends ceased their respective accelerations in the month.

-- Carl Riccadonna, Bloomberg Economics

Read more for the full reaction note from Bloomberg Economics.

Commerce Department figures released April 30 showed the Fed’s separate preferred gauge of inflation met policy makers’ 2 percent target in March for the first time in a year. The preferred core index, seen by officials as a better gauge of underlying inflation trends, was up 1.9 percent from March 2017.

Wages, which feed into inflation pressures, are growing only moderately even as the job market remains tight. A separate report released Thursday by the Labor Department showed average hourly earnings adjusted for inflation rose 0.2 percent from April 2017.

Other Details

  • Energy prices rose 1.4 percent from previous month after 2.8 percent decline; food costs advanced 0.3 percent after 0.1 percent gain
  • Costs for new vehicles fell 0.5 percent after no change the prior month; used-vehicle prices dropped 1.6 percent, most since March 2009, following a 0.3 percent decline
  • Airfares fell 2.7 percent, most since January 2014
  • Apparel prices increased 0.3 percent after falling 0.6 percent
  • Expenses for medical care rose 0.1 percent; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies
  • The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents

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