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Weak CPI Reading Means the Fed Will Keep Its Foot on the Gas Pedal

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Thursday’s economic data was mixed: weekly jobless claims unexpectedly rose while housing starts in April unexpectedly fell. The Labor Department reported that the number of people who applied for new unemployment benefits jumped 32% to 360,000 in the week ending May 11, the highest level in a month and a half. But the average of new claims over the past month remained near a five-year low.

Construction on new homes in April fell 16.5% -- the lowest level since November – to a seasonally adjusted annual rate of 853,000, according to the Department of Commerce. April housing starts were 13.1% above the April 2012 rate of 754,000.

The number that most economists were watching was Thursday’s CPI report. Consumer prices slipped 0.4% in April because of a sharp decrease (8.1%) in gasoline prices. Food prices rose 0.2%. CPI increased 1.1% over the last 12 months, the smallest 12-month increase since November 2010. Core CPI – which excludes volatile items like food and energy – inched up 0.1%. The core rate has risen 1.7% over the last 12 months.

Julia Coronado, Chief Economist of North America for BNP Paribas, says the decline in energy prices is positive for the economy and the weak reading on core inflation underscores the argument that policy makers should focus their attention on jobs, not inflation.

“We’re moving away from [the Fed’s] price level target,” she says in the accompanying video. “The Fed will keep on easing so that should be good news for markets.”

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Coronado and her team are expecting U.S. economic growth to drop in the current quarter to an annualized rate of 1% compared to the 2.5% rate in the January to March period. Lackluster auto sales over the past three months could further add pressure to economic output, Coronado adds. Gross domestic product will average 2% this year with fiscal tightening weighing down second half growth, she estimates.

“The underlying state of the economy is not horrible but it’s definitely not firing on all cylinders,” she argues. “Fiscal drag is taking the steam out of some sectors. The [employment] trend is still improving…and housing is definitely positive but it’s not going to be a straight line up in this recovery.”

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Barry Ritholtz, CEO of Fusion IQ and author of the “Big Picture” blog, says economic growth of 1% to 2% has become the new “norm” because of the massive deleveraging the country is experiencing as a result of the post-credit crisis. He agrees with Coronado that the Fed will keep its “foot on the gas pedal” to boost growth but notes that the sell-off in commodities – gold, copper and gasoline – could indicate that the market is anticipating a broader economic slowdown.

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