The 0.2% headline CPI for April matched the expected reading; this follows a 0.3% decline in March. The core rate was slightly lower than its expected reading at 0.1%, following a decrease of 0.1% last month. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 2.2% and 1.9% higher, respectively.
The CPI’s energy price index rose by 1.1% in April. If we exclude the effects of energy, the CPI would still have been 0.1% higher sequentially in April and 1.7% higher than a year ago. The CPI excluding food prices would have been 0.2% month-to-month and 2.5% higher year-over-year. Food prices were 0.2% higher. Food and energy combined account for slightly more than 20% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (which is 34% of the CPI) rose by 0.3%, and the tobacco index rose by 4.2% in April. The medical care index fell by 0.2%.
It is once again worth noting that the “services less energy services” component of the CPI accounts for 59.8% of the entire index and is growing by 2.7% annually.
April’s monthly change in prices was a return to trend following an weather-related dip in March: the average monthly change over the last 12 months has been 0.2%. The annual pace of growth has been softening slightly on both the core and the headline rates, but is still around the point where it is essentially consistent with the Fed meeting its inflationary target (which is based on the PCE deflator). We are also now finally starting to see some more tangible upward pressure on wages and salaries as the existing labour market slack (measured as the gap between the U6 and U3 unemployment rates) closes to below average levels. This should help underpin inflation around current levels, even though we still do not think it is about to accelerate in any dramatic fashion. Furthermore, the trend is still pointing to higher inflation looking at many of the underlying core components, such as the Cleveland Fed’s median CPI, the Atlanta Fed’s core sticky prices index, and even the Dallas Fed’s trimmed mean CPI index (chart 2). Finally, the latest TIPS readings on 10-year notes suggests inflation of 1.9%, which is something the Fed would be reasonably happy with and would not deter it from its current course of action.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.