Highlights:
- All items CPI rose 0.2% month-over-month in April while prices excluding food and energy were up 0.1%. Both increases were a tenth short of expectations.
- A 3% monthly increase in gasoline prices put upward pressure on headline inflation. That could be a factor again in May with pump prices remaining firm early in the month and WTI oil prices sitting north of $70 per barrel.
- Sizeable monthly declines in used car and recreation prices—both the largest since 2009—were behind the downside surprise in core inflation.
- The year-over-year rate of headline inflation rose to 2.5% in April, the second-highest rate since 2012. Annual core inflation of 2.1% was unchanged from March but up from 1.8% in February.
Our Take:
A slight undershoot on core prices left today’s CPI release a bit short of expectations. But taking a step back, year-over-year core inflation was on the firmer side of the Fed’s 2% objective for a second consecutive month. Rising gasoline prices pushed the headline rate to its second-highest reading since 2012. And even with a 0.1% increase in April, monthly core inflation is still running closer to a 2-1/2% annualized rate so far this year. So today’s report remains consistent with the view that inflation risks are increasingly skewed to the upside of 2%. We think the Fed no longer mentioning they are “monitoring inflation developments closely” in May’s policy statement was a reference to that.
Higher oil prices and easy year-ago hurdles for core inflation point to year-over-year inflation continuing to pick up in the near-term. That should reinforce the recent move in breakeven inflation rates, which are now their highest since August 2014. Rising spot inflation and firmer inflation expectations will keep the Fed raising rates steadily but gradually this year and next. We expect a rate increase at the next meeting in June, and wouldn’t be surprised if the ‘dot plot’ consensus finally shifted to our view that a total of four rate hikes will be appropriate this year.
