Highlights:
- The all items index rebounded by 0.2% in April but the year-over-year rate slipped to 2.2% from 2.4% in March.
- Higher energy prices (+9.3% from last year) continued to boost headline inflation.
- Consumer prices excluding food and energy rose by less than expected (+0.1%) following a 0.1% dip in March that was just the second monthly decline in decades.
- Rising shelter costs offset declines in a number of other core components in April.
- Year-over-year core inflation slipped to a 1½-year low of 1.9%.
- Prices for wireless telephone services declined again in April; a more substantial 7% drop in March shaved about 0.1 percentage point off of headline inflation.
Our Take:
Inflation has come off the boil in the last two months, though we don’t see the latest data standing in the way of a June rate hike. Following last week’s labour market report that showed a rebound in job growth and 4.4% unemployment rate, there seems to be a bit more urgency from Fed officials to continue removing accommodation. Whereas, a year ago, a slow start to the year led to a more cautious approach from the Fed, policymakers now seem more than willing to look through soft Q1 GDP. Inflation and wage data isn’t yet signaling a sharp tightening in monetary policy is required, but with unemployment at a 16 -year low and inflation hovering around 2%, we expect the Fed will proceed with gradual rate hikes rather than risk falling behind the curve. We think a June rate hike is order, as well as further tightening over the second half of the year.
