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United States Inflation April 2019

United States: Inflation edges up on strong shelter and service price gains in April; core pressures remain moderate

Consumer prices increased 0.3% over the prior month in April, down from March’s reading and market expectations, both at 0.4% month-on-month. As in previous months, sharp increases in energy prices—and notably commodities such as gasoline—drove the reading, while more modest yet robust price gains were registered for medical commodities and shelter. Meanwhile, food prices declined slightly, while further sizeable declines were recorded for the price of apparel and used cars and trucks. Core consumer prices—which exclude volatile items such as food and energy—rose a mild 0.1% again in April, matching both the February and March prints.

Meanwhile, inflation edged up to 2.0% in April from 1.9% in March; however, it undershot expectations of a stronger 2.1% print. As for core inflation, it also ticked up to 2.1%, from 2.0% in March and matched expectations. Energy and food price pressures remained modest on a year-on-year basis—partly owing to a high base effect due to elevated oil prices around the same time last year. As for core price increases, they were driven primarily by strong services inflation, and notably by large rises in the cost of shelter. Leslie Preston, senior economist at TD Economics, commented: “We are back to the familiar territory of rising prices for core services being offset by falling prices for core goods, leaving overall inflation right around 2%. While some of the worst core goods deflation will likely reverse in the coming months, services inflation could soften slightly, leaving overall inflation relatively tame”.

Turning to the outlook, energy prices appear to have some further room to increase, reflecting gains in oil markets in past months, though high-base effects from last year will limit the impact on headline inflation. Moreover, the effects of the increase in tariffs enacted on 10 May by the U.S. administration—matched by retaliatory levies from China—could start impacting inflation dynamics, though this will crucially depend on trade negotiations progress in coming weeks. In a best-case scenario, an agreement could be reached quickly and lead to some swift de-escalation of tariffs, while in a worst-case outcome, talks would break down and President Trump would impose a 25% tariff on more than USD 300 billion of additional Chinese imports currently not taxed.

According to Leslie Preston, “increased tariffs on Chinese imports are likely to stoke price increases across a variety of goods. […] The Fed will try to look through these temporary price increases when setting monetary policy, but that can be a tricky untangling job. Ultimately these higher taxes cut purchasing power, and weigh on economic growth, which weakens inflation momentum in turn”. However, ING analysts warn that this is not sufficient to infer a rate cut from the Fed is likely any time soon. In their view, “we expect the strength in wage growth to gradually exert upward pressure on core inflation over coming months. […] Given the robust activity story, inflation backdrop and recent improvement in financial conditions, we think it is more likely that the Fed remains on hold for the foreseeable future”.

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