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Inflation: A Temporary Reprieve in April

The consumer price index showed only small increases on the month—but May’s report may not be as tame

by BusinessWeek, Standard & Poor's, and Action Economics staff

Inflation appeared to loosen its grip on the U.S. economy in April, but the reprieve may prove only temporary. According to a government report released May 14, the headline U.S. consumer price index rose 0.2% in April. The so-called core rate, which excludes food and energy prices, rose 0.1%.

The data were just slightly better than the consensus estimates of 0.3% for the headline rate and 0.2% for the core, says S&P Economics.

Looking more closely at the report, energy prices were flat in April, a pleasant surprise, but are poised to jump again in May.

Big Price Hikes for Grains

The eye-grabber for the month was food prices, which jumped 0.9%. Food at home (groceries) was up 1.5%, the biggest increase in 15 years. The food price increase was in almost every product, but on a year-over-year basis was greatest for grain-related products, including fats and oils, dairy, and cereals and bakery.

Apparel prices rose 0.5%, partially offsetting the 1.3% March drop. This reflected an early Easter. New car prices fell another 0.2% as manufacturers increased discounts to raise car sales.

Over the last 12 months the CPI is up 3.9% and the core CPI is up 2.3%. The core rate is higher than the Fed would like but hardly in panic territory. The Federal Reserve has room to keep inflation on the back burner until it is sure the recession risk is over, says S&P Economics.

Bad News Expected for May

Bear Stearns (BSC) economist John Ryding noted that April core inflation was held back by a low reading on shelter costs (due to higher utility costs and a drop in lodging-away-from-home prices), while the overall CPI was held back by a decline in gasoline prices. But, he warned in a May 14 e-mail , "[gasoline] prices are likely to rise sharply in May and the increase in food prices in April suggests that pressures in this area are intensifying."

With import prices rising sharply and crude oil at $125 per barrel, "May's CPI report is likely to be far less benign than April's," he wrote.

Stock and bond prices advanced May 14 after the release of the report. The April CPI report "was good news for the bond market," says Action Economics. "Yet the headline price relief is more a function of aggressive seasonal factors and a delayed pass-through of oil price gains to gasoline price increases, so the good news for the Federal Reserve will likely prove temporary," Action Economics notes.

"Though the Fed continues to face downside growth risks over the near-term, the inflation problem may prove to have greater shelf life than credit market strife and sluggish growth—despite the temporary relief in the May 14 report," says Action.

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