The 0.4% increase in the headline CPI for April was higher than the expected reading of 0.3%; this follows a reading of 0.1% in March. The core rate was 0.2% higher, matching the expected reading and following a 0.1% rise in March. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 1.1% and 2.1% higher, respectively.
The CPI’s energy price index rose in April by 3.4% (the largest monthly change since February 2013), following a 0.9% rise in March. If we exclude the effects of energy, the CPI would still have been 0.2% higher in April and was 2.0% higher than a year ago, the same as in the previous month. The CPI excluding food prices would have risen by 0.4% and was 1.2% higher year-over-year. Food and energy combined account for slightly less than 25% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (33% of the CPI), medical care, motor vehicle insurance, and airline fares were the key positive contributors. Any drag largely came from household furnishings and operations, apparel, new and used cars and trucks, and communication.
It is also worth noting that the “services less energy services” component of the CPI accounts for 59.7% of the entire index and is now growing by 3.0% annually. This has been an important anchor helping offset any commodity-related decreases in prices.
April’s increase in the CPI was again largely being driven by the main components of shelter and medical care. However, the reality is that inflation does seem to be firming and the sharp pickup in energy prices from around $26 per barrel in February to almost $50 per barrel today has been a significant factor. This recovery is starting to get the market more concerned about inflation judging by the small recovery in TIPS yield spreads, as the headline CPI continues to moves back up toward where the core readings are (i.e., hovering around 2%). Once again it is worth noting that the Fed targets the PCE (personal consumption expenditure) price index, where there has recently been a marked divergence from the CPI. This has largely been due to the different relative weighting of both shelter and healthcare. The Fed has specifically reiterated that its inflation target is asymmetric, as such it should at times be able to run inflation a little hotter than at other times. In our view this would definitely seem to be one of those times. However, recent rhetoric from Fed officials suggests that the pressure to tighten again (possibly as soon as July) remains quite strong, even though it is officially still very data dependent.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.