WASHINGTON — U.S. consumer prices were under wraps last month, a government report showed, especially when food and energy prices were stripped out, further evidence that the economic slowdown is easing some of the inflationary effect of recent sharp gains in food and energy prices.
The data should ease concerns expressed by Federal Reserve officials in recent days about the inflation outlook. At a minimum, the consumer price data suggest inflation hasn’t become embedded in the economy, meaning officials can keep interest rates low in response to the slowing economy.
The consumer price index increased 0.2% in April, the Labor Department said Wednesday. Excluding food and energy, it advanced 0.1%. Wall Street economists had expected a 0.2% rise in both the headline and core indexes, according to a Dow Jones Newswires survey.
Unrounded, the CPI rose 0.207% last month. The core CPI advanced 0.104% unrounded.
Consumer prices rose 3.9% on a year-over-year basis, down slightly from the prior month. The core CPI grew a more modest 2.3% compared to April 2007. Over the past three months, core inflation rose at only a 1.2% annual rate.
The year-on-year core increase is slightly above the Fed’s presumed comfort zone of around 1.5% to 2%. The Fed’s preferred gauge, the core price index for personal consumption expenditures, is closer to that range at 2.1% annual growth through March.
The latest data should provide some relief to Fed officials that inflation isn’t gaining a strong foothold in the economy. Officials have for months focused monetary policy on housing and credit market turmoil, cutting the target fed funds rate at which banks lend to each other by 3.25 percentage points since September to 2%.
But in a statement accompanying last month’s decision to lower the fed funds rate by 0.25 percentage point, officials said “uncertainty” about inflation “remains high.” Economists took that language as an indication that officials are growing more worried about inflation and are unlikely to cut rates further.
Comments from several Fed officials Tuesday suggest inflation remains a top worry. Data on price pressures has been “disappointing” and on the “high side of where I would like it to be,” San Francisco Fed President Janet Yellen said in a speech. Kansas City Fed President Thomas Hoenig called inflation at “unacceptable levels.”
Yet the tame core CPI gain conforms to a scenario outlined by Minneapolis Fed President Gary Stern in an interview with the Wall Street Jouirnal and Dow Jones Newswires Tuesday. Food and energy-driven gains in headline inflation mean real incomes aren’t rising much, Stern explained, and “that has consequences for overall demand in the economy and that just tells you that lots of other prices aren’t likely to rise all that much.”
Energy prices were unchanged last month after jumping 1.9% on March, according to Wednesday’s report, though with oil prices hitting record highs this month, that will likely change in May. Gasoline prices fell 2% last month, but natural gas prices spiked 4.8%.
Food prices rose 0.9% on the month, the biggest rise since 1990, and 5.1% versus one year ago.
Medical care prices, meanwhile, increased a modest 0.2%, while clothing prices advanced 0.5%. Transportation prices fell 0.7% on the month, as airline fares and new vehicle prices both fell.
Housing, which accounts for 40% of the CPI index, was up 0.3%. Rent increased 0.3%. Owners’ equivalent rent advanced 0.2%.
In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.5% in April, suggesting incomes aren’t keeping pace with prices, which could weigh on consumer spending.
Average hourly earnings increased 0.1%, and average weekly hours were down 0.3.
