Softer Inflation Data For April Doesn’t Change Fed’s Policy Outlook

News reports covering yesterday's April report on consumer emphasize that the monthly increase fell short of the consensus forecast. The cooler-than-expected gain is cited by some analysts as a factor that will allow the Federal Reserve to slow its plans for raising interest rates. Perhaps, but reviewing the annual pace of inflation and the latest estimates for GDP growth in the second quarter suggests that it's premature to assume that the is set to back off its recent plans for three or four rate hikes this year.

The Consumer Price Index (CPI) increased 0.2% last month, below the 0.3% that economists were looking for via Econoday.com's consensus forecast. Core inflation, which ignores energy and food prices and is generally considered a more reliable measure of pricing pressure, was up 0.1% in April, below the crowd's 0.2% forecast.

Note, however, that the unadjusted (before seasonal adjustment) one-year change for headline CPI ticked up last month to 2.5%, the fastest gain in more than a year and moderately above the Fed's 2.0% target. Core CPI in unadjusted terms held steady at a 2.1% rate, but the gain marks the second straight reading of a one-year high.

“Labor market conditions are still tightening [and] we think underlying inflation will trend higher from here,” Michael Pearce, senior US economist at Capital Economics, tells Market Watch. “That should convince the Fed to raise rates a total of four times in 2018.”

Meanwhile, the Treasury market's implied inflation forecast is sticking close to a five-year high. The yield spread for the nominal five-year rate less its inflation-indexed counterpart, for instance, settled at 2.12% yesterday (May 10). It appears that yesterday's CPI data had no effect on the crowd's expectations for pricing pressure.

 

Keep in mind, too, that the early estimates for GDP growth in the second quarter point to a pickup in growth. If accurate, the macro trend appears set to keep the current inflation rate steady if not raise it further.

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