Benign Data Ease Fears of Inflation
Consumer prices without the volatile energy and food segments were flat in April, the Labor Department said Wednesday in a surprisingly tame report that helped ease inflation fears.
It was the first time since November 2003 that the so-called core measure of the consumer price index showed no increase. Economists had expected it to rise 0.2% after a worse-than-expected 0.4% jump in March.
Falling prices for clothing, hotel rooms and new cars were credited for the benign showing in April.
Including the volatile food and energy sectors, however, inflation rose 0.5% in April, more than the 0.4% increase expected by economists. The rise was paced by a 4.5% jump in energy and a 0.7% increase in food.
It was the biggest monthly jump in energy costs in two years. But many economists noted that oil prices had fallen in May.
Inflation for the Los Angeles-Riverside-Orange county area rose 1% in April, up from a 0.9% gain in March.
The tame core inflation report cheered investors and analysts. They interpreted it as a sign that inflationary pressures were cooling, giving the Federal Reserve room to become less aggressive in its diet of “measured” interest rate hikes that began in June.
Major stock indexes staged a strong rally, marking their best three-day gain in more than six months. Bond yields fell.
The report was an especially strong relief coming after March’s surge in core inflation, which raised concerns that the economy might slow even while inflation leaped.
“There seems to be an ebbing of inflation pressures, and this creates an opportunity for consumers because for quite some time they were falling behind in their purchasing power,” said Anthony Chan, senior economist with JPMorgan Asset Management. “What this does is give them a little time to catch up.”
Chan said consumers still had some distance to go to recover, but with oil prices slipping this month, inflation should continue to cool in the months ahead. “The trend is quite consumer-friendly,” he said.
Still, overall inflation in April outpaced gains in hourly wages, meaning that workers in effect are continuing to get a pay cut. Inflation-adjusted weekly earnings of hourly workers advanced 0.2% in April, after falling 0.3% in both February and March, the Labor Department reported.
“I think it’s very emblematic of this ongoing disconnection between the economy and living standards of working families,” Jared Bernstein, an economist at the liberal Economic Policy Institute in Washington, said of the celebration over Wednesday’s low core inflation while wage increases continue to lag behind.
“If working families could just go off food and gas for a couple of quarters, they might be all right,” he said. “But in the real world, they are falling behind.”
Analysts also cautioned that the surprisingly low core inflation in April does not change longer-term trends that point to persistent inflation. Core inflation is still up at an annual rate of 2.6% this year, compared with 2.2% for the last year. Overall inflation continues to grow faster than any time since 1990.
“We can argue about what the pace is going to be, but there’s no question that we are in a range of 2.5% to 3% [core] inflation,” said Ken Goldstein, an economist with the Conference Board, a research organization in New York. “All of that says the Fed is going to stay on its course.”
Mickey Levy, chief economist for Bank of America, agreed. “One month doesn’t make a trend,” he said.
Levy said the markets were foolish to believe that the Fed would change its pace of rate hikes because of the April number alone. The Fed is expected to raise its key short-term rate, now 3%, by another quarter-point at its next meeting June 28-29.
“The Fed is not as fickle as the market and it doesn’t change its forecasts or objectives with any monthly number,” Levy said.
