Consumer Prices Remain Tame In April

The Consumer Price Index rose 0.2 percent in April, as gasoline prices inexplicably fell 2.0 percent. The drop makes absolutely no sense. Where does the BLS buy there gas? Food prices rose 0.9 percent in April and are up 5.0 percent over the past year. Excluding food and energy the CPI rose 0.1 percent, which is on the low side of expectations.

Higher Energy Prices Are Fueling Inflation Worries

The Consumer Price Index rose 0.2 percent in April and is now up at a 2.3 percent annual rate over the past three months. Food prices remain problematic, leading the increases in April. Grocery store prices rose 1.5 percent in April and are up 5.9 percent over the past year. The largest gains are in diary products, fats & oils and cereals & bakery products. Restaurants have not increased prices anywhere near as much as grocery stores. Prices for “food away from home” rose 0.3 percent in April and are up 4.1 percent over the past year. One factor restraining menu prices is that the rising costs of necessities are causing consumers to cut back on discretionary purchases, such as dining out. In other words, more folks are walking to work and bringing a brown bag lunch.

Gasoline prices are certainly the most difficult line to explain in this month's release. All we can attribute the 2.0 percent decline to is seasonal adjustment. On an unadjusted basis, prices were up over 5.5 percent on the month. We look for continued increases in this sector next month.

Core Inflation Is Still Relatively Well Behaved

Excluding food and energy prices, the CPI increased 0.1 percent. Core inflation continues to be contained by moderating housing costs. Shelter accounts for 32 percent of the overall CPI and 42 percent of the core. There is no question that housing is currently in oversupply. The housing vacancy rate has recently risen to 2.9 percent, which means the supply of rental apartments is being supplemented by a shadow inventory of homes available for rent as well. Owners' equivalent rent increased just 0.2 percent in April and is up at a 2.3 percent annual rate over the past three months. On a year-to-year basis, owners' equivalent rent has decelerated from 4.3 percent back in December to 2.6 percent today.

Prices for other goods and services also show signs of moderating. Prices for medical care, for example, have slowed to just a 1.6 percent pace over the past three months. Prices for medical care commodities - prescription drugs, nonprescription drugs, and medical supplies - decreased 0.2 percent in April and are now up just 3.0 percent over the past year.

The core CPI is now up 2.3 percent over the past year. With the economy moderating, core inflation should slow even further in coming months. The larger year-to-year rise in the headline inflation figures represents a greater threat to economic growth than it does to Fed policy. Higher food and energy prices are taking money out of consumers pockets and causing folks to cut back on spending on just about everything else. The run-up in prices for basic necessities is one reason credit card balances are increasing so rapidly and raises questions as to how much punch the tax rebates will provide to the overall economy.

Wachovia Corporation
http://www.wachovia.com

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