The rent is getting steep and gas prices are climbing again. But broad price inflation is still tame, and is unlikely to squeeze consumers or upend financial markets any time soon.
That’s the take by Bank of America Merrill Lynch senior U.S. economist Michael Hanson, who points out in the attached video that while “core” inflation is “firming, it is still at very low levels.”
Gains in shelter costs, including rents, led the core measure of consumer prices – which excludes food and energy products - to a 0.3% increase in April, slightly above forecasts. That lifted the annual gain in the core Consumer Price Index to 1.8%. Overall CPI arrived as expected at 0.1%.
Hanson points out that the 0.3% rise in core CPI even overstated the move, as it was rounded up from slightly more than 0.25%.
He also notes that CPI is registering more price gains than alternate measures of inflation such as import prices, producer prices or the core personal consumption expenditures price gauge. The latter number is preferred by the Federal Reserve and is the one the Fed wants to see rise toward its 2% long-term target to set the stage for its first rate increase since 2006.
Fed Chair Janet Yellen has said that inflation doesn’t need to get above 2% before the Fed tightens, but that policy makers must be reasonably confident inflation is headed there prior to a “liftoff” in rates.
“I don’t think the Fed is trying to overshoot on inflation” by letting it rise more before lifting rates, says Hanson. “But they do seem confident” that core inflation will move up to its preferred zone.
The Fed seems far more focused on indicators of labor-market momentum and hints of a broader rebound in economic activity than it is on inflation as it considers when to end its seven-year stay at zero interest rates.
The Treasury bond market has grown a bit twitchy in the past month on every hint that the Fed is poised to move. But Hanson feels that broad macro conditions aren’t there for an inflation or policy shock to the bond market.
While real household incomes have been slightly outpacing inflation recently, wage growth is still lagging their pace from this point in past economic recoveries, for example.
“I’m skeptical that we’ll see a big pickup in inflation,” Hanson says. “The levels we’re at now are probably the levels it will be at for much of the rest of the year."
“There are still a lot of disinflationary pressures out there. The dollar is still strong. Commodities are still weak. So even if the labor market tightens – and it’s really not tight just yet – I think it’s going to take a while before it starts passing through meaningfully to higher inflation.”
Which at least could mean that savings at the mall can help Americans cover those rising rents.
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