The latest CPI report gives us more clues into our economy and it will be interesting to see if the Fed references the report ahead of their June 13-14 meeting. While last Friday’s report showed an expected 0.2% monthly increase in the headline inflation number, the April core inflation reading, which excludes the volatile food and energy components, showed surprising weakness, up less than expected at 0.1%, after a decline in March.
The core CPI is now running at a 1.9% annual rate and has declined four consecutive months on a year-over-year basis. This trend raises some concerns that perhaps we haven’t completely left behind the deflationary pressures precipitated by the financial crisis. Digging into the details of the report, many of the components actually declined in April, including new and used vehicles, medical care, apparel prices and wireless phone services. This weakness was offset by the continued strength in shelter prices and a large increase in tobacco prices following the implementation of recent tax hikes.
Other important inflation indicators are also showing signs of rolling over. The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation measure, is off its recent peak of 1.8 %. It’s now at 1.6%, below the Fed’s desired 2.0% target. On the wage front, average hourly earnings, despite the improvements in the labor markets, have also fallen from a recent peak of 2.9% to now 2.5%. Lastly, the market expectations for inflation, as expressed in the breakeven inflation rate from the TIPS markets, are also showing troubling signs of weakness. After a sharp increase to a high of 2.08% in January, the TIPS breakeven rate has turned down to a 1.86% level.
While these recent changes could turn out to be minor blips on the path towards higher inflation in the future, they do raise questions for the popular reflationary thesis discussed at the beginning of the year.
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The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households.
The Personal Consumption Expenditure Price Index (PCEPI) is one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy. Of all the measures of consumer price inflation, the PCEPI includes the broadest set of goods and services.
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