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United States Inflation April 2018

United States: Headline inflation ticks up in April but undershoots expectations

Consumer prices rose 0.2% from the previous month in April, contrasting the 0.1% month-on-month decline recorded in March. The result undershot market analysts’ expectations of a 0.3% increase and largely reflected a 3.0% rebound in prices at the pump, which had fallen 4.9% month-on-month in March. It was also impacted by a 0.3% increase over the previous month in food prices, and a modest 0.1% rise in core consumer prices. Inflation only ticked up marginally to 2.5% in April—nevertheless a 14-month high—from 2.4% in March.

Core consumer prices, which exclude volatile items including food and energy prices, rose 0.1% from the previous month in April, decelerating slightly from March’s 0.2% increase and undershooting analysts’ prediction of a 0.2% rise. Shelter prices rose 0.3% in April (March: +0.4% month-on-month) as both rent and hotel prices posted robust gains. Price growth for medical care services moderated, while personal care services made strong month-on-month gains, and apparel prices rebounded after recording a decline in March. Conversely, prices for transportation services, new vehicles, and used cars and trucks all fell in April, with used cars and trucks recording the steepest month-on-month price decline since March 2009.

Meanwhile, core inflation was steady at March’s one-year high of 2.1%. The April core PCE inflation reading, the Federal Reserve’s preferred measure of inflation, should also remain steady.

The gradual pick-up in core inflation in recent months has been a central factor supporting the Federal Reserve’s rationale for tightening interest rates, and a closely watched indicator to predict the pace of rate hikes. While inflation is expected to accelerate further in coming months as tax cuts fuel stronger economic growth, April’s largely steady reading calmed market fears of a sustained inflation overshoot, which would force the Fed to accelerate its tightening.

The FOMC is expected to raise interest rates by 25 basis points, to between 1.75% and 2.00%, at its next meeting on 12–13 June. Beyond that point, analysts are still split on whether to expect one or two more rate additional hikes this year, and the April data does not seem to add credence to the more hawkish scenario. Furthermore, recent episodes of financial volatility and threats of protectionist policies pose sizeable risks to the economic outlook and could force the Fed to recalibrate the pace of rate hikes.

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