The consumer-price index stabilized in April following the first drop in a year, though a gauge excluding food and energy posted the smallest year-over-year increase since October 2015.
Together, according to Bloomberg, the data indicate progress consistent with the Federal Reserve’s view of the economy and inflation ahead of policy makers’ mid-June meeting, where they are widely expected to continue their gradual pace of interest-rate increases with a quarter-point hike. The Fed may feel less pressure, however, to pick up the pace should core inflation remain subdued.The pickup in retail sales -- with gains in nine of 13 major categories -- eases concern from earlier in the year about a loss of momentum in household spending, the biggest part of the economy. The CPI results are a reminder that while businesses are regaining some pricing power, inflation is hardly breaking out.
“It’s a pretty decent overall picture of the U.S. economy,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Consumer spending is rebounding, though possibly not as much as we expected. On the inflation front, there’s not a lot of pricing pressure, and it looks like inflation is gravitating toward the Fed’s goal.”
A separate report showed that the University of Michigan consumer confidence index climbed to a four-month high in May, and within that, buying conditions for large household durables rose to the highest since 2005, reinforcing signs that Americans remain optimistic about spending.
“Today’s sub-consensus U.S. data is unlikely to rock the Fed’s boat, meaning there are increasingly few reasons for not hiking in June,” James Smith, an economist at ING in London, wrote in a note.
Consumer Demand
So-called control-group sales, which are used to calculate gross domestic product and exclude the categories of food services, auto dealers, building materials and gasoline stations, rose 0.2 percent after a 0.7 percent March gain that was the biggest since April 2016. The Commerce Department data don’t reflect changes in prices.
On the inflation front, the news from the Labor Department was more mixed. While consumer prices climbed for shelter, energy, tobacco and food, costs declined for new and used vehicles, mobile-phone services, apparel and recreation. Medical care costs dropped 0.2 percent, the most since May 2013.
The CPI rose 2.2 percent from a year earlier, a tad below the forecast for a 2.3 percent gain and following a 2.4 percent increase in March. Core prices rose 0.1 percent from the prior month after falling 0.1 percent, and were up 1.9 percent from a year earlier.
One unusual factor in consumer prices: The tobacco index jumped 4.2 percent, its biggest gain in eight years, largely reflecting a $2 per-pack increase in California state taxes on cigarettes that went into effect on April 1. Without that boost, the core CPI would have been little changed, according to Omair Sharif, senior U.S. economist at Societe Generale.
Excluding the tobacco tax effect, the overall CPI index would have been up 0.1 percent in April instead of 0.2 percent, according to Steve Reed, an economist at the Labor Department.
The positive retail sales results confirm a strong rebound in second-quarter growth and the falling unemployment rate probably keeps a Fed rate hike likely for June, Ted Wieseman, an economist at Morgan Stanley, wrote in a note.
At the same time, Wieseman wrote that “core inflation is probably going to need to get back on track” in the coming months to support further tightening via interest rates or the balance sheet at Fed meetings followed by press conferences, which occur at alternating sessions.