Lower-than-Expected Inflation Supports a "Wait-and-See" Fed Stance

The consumer price report for April came in a touch softer than expected, rising 0.2%. The year-over-year rate nudged downwards to 3.9% from 4%. Excluding food and energy, the index increased by a smaller-than-expected 0.1% (consensus: 0.2%). Year-over-year growth in the core index came in at 2.3%, slightly softer than the 2.4% rate seen in March.

Overall consumer prices in April were pressured higher by a 0.9% increase in food prices. The energy index was unchanged and gasoline prices dropped 2% as aggressive seasonal factors pulled gas prices down. Core prices were up 0.1% with a boost coming from owners' equivalent rent, which was up 0.2%, although offsets were found in airline fares (down 0.5%), new vehicle prices (down 0.2%) and recreation prices (down 0.1%) amongst others.

Today's data will provide some modest relief to policymakers, although at 2.3% and 3.9%, respectively, both the core inflation rate and the overall rate are both still elevated. The risk stemming from the latter is that inflation expectations could drift higher. There is some survey evidence of this as the latest University of Michigan report showed increases in both the one-year and five-year inflation expectation components.

The Fed has signalled that it wants to take more of a wait-and-see approach to policy given the substantial moves enacted to combat liquidity issues and downside risks to the growth outlook. Today's weaker-than-anticipated inflation data support the case for the Fed to remain on the sidelines for now as they assess the impact of their previous actions.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.