The consumer price index (CPI) rose 0.2%m/m in April, as expected by markets. On a year-on-year basis inflation was 2.2%, a continued deceleration from its 2.8% peak in February.
It was necessities that took prices higher in April. Indices for shelter (+0.3%), energy (+1.1%), tobacco (+4.2%) and food (+0.2%) all rose on a monthly basis.
Leaning against these price increases, many categories saw falling prices, including apparel (-0.3%), education/communication (-0.3%), medical care (-0.2%), and new and used vehicles.
This tug of war between various categories left core inflation up a modest 0.1% (m/m) in April, after a surprising 0.1% drop in core prices in March. That leaves core inflation at 1.9% on a year-on-year basis, its slowest pace since October 2015.
The recent softening in core inflation is a result of continued deflation in core goods prices, down 0.6% year-on-year, and now a slowing in core services prices. Core services inflation had run as strong as 3.2% last fall, but has now decelerated to 2.7%.
Key Implications
April’s CPI data provided some reassurance that there are still inflationary forces in the economy. However, the softening in recent months in core inflation may cause some concern for the Fed as it considers its next rate move. The Fed is very much in data dependent mode, and it will need to balance a red hot job market with an inflation picture that has a bit less oomph than it would like.
Overall, we expect the Fed to keep the faith on price pressures building down the line reflecting a strengthening economy. Price pressures in other measures, like the producer price index, showed heartier gains in April, and suggest higher inflation is on its way. So long as the economic data continues to cooperate over the next month, the Fed looks set to raise rates another quarter point in June.
