The headline consumer price index (CPI) bounced back 0.2% (month-on-month) in April, after a 0.1% decline in March. That took inflation up to 2.5% (year-on-year), continuing its upward march since last June.
A 1.4% increase in energy prices helped buoy headline inflation in April, as prices at the pump rose 3%, following a 4.9% decline in March. Energy prices were 7.9% higher than their year-ago level, largely reflecting increases in petroleum-related prices.
Core inflation was up 0.1% on the month, slightly less than expected. That left the year-on-year pace of core inflation steady at 2.1% in April. The slight loss of momentum in core inflation was due to core services prices, which rose 0.2% in April. Core goods prices on the other hand were down 0.1% on the month, just like in March.
Delving further into the details on services, shelter inflation remained healthy, up 0.3% on the month. However, other services prices were softer, such as medical care (+0.1%), education & communication (0.0%) and recreation (-0.4%), which had its biggest decline since 2009 thanks to price declines for things like cable bills and admission prices. Overall inflation for core services remained at 2.9% in April, the same as March’s pace.
While core goods prices remain in deflationary territory, some key items are seeing increased price pressures. Apparel for example rose 0.3% on the month, and is now up 0.8% from a year ago. Still prices for used cars & trucks fell (-1.6%), as the recent price spike corrects. Airline fares also fell (-2.7%) on the month, and are down 6.9% from a year ago.
Also notable in April was a 0.3% increase in food prices, the largest increase in over a year. The year-on-year pace of food inflation remains modest at 1.4%, but has been trending upwards over the past 18 months.
Key Implications
April’s inflation data reminds us that while we expect inflationary pressures to continue to rise, it is unlikely to be a linear process. There is some residual seasonality in price measures in the U.S., where hot price increases early in the year are followed by a period of softer readings. We continue to expect core inflation to continue to rise as a strong economy and wage pressures see price hikes percolate through the economy (see our recent report).
Now that the Fed’s preferred PCE metric (headline) reached the 2% target in March, the question is how much more juice is still in the tank. The uncertain impact of tax cuts and increased government spending present upside to the outlook, but recent financial volatility and the threat of trade wars threaten to deflate some of the stimulus. This is the key question the FOMC is wrestling with as it calibrates the pace of rate hikes. Another quarter-point rate hike looks like a done deal at the next meeting on June 13th. More important will be the Fed’s updated economic projections released at the same time, which will give us a sense of whether the Fed has cha
