Tame inflation: April consumer prices up just 0.2 per cent

This May 3, 2017 file photo shows bananas for sale at a Whole Foods Market in Upper Saint Clair, Pa. U.S. wholesale prices edged up just 0.1 percent in April 2018 held down by a big drop in food costs. It was the smallest gain in four months. The April increase in the Labor Department’s producer price index, which measures inflation pressures before they reach consumers, followed a 0.3 percent rise in March, the government reported Wednesday, May 9. (AP Photo/Gene J. Puskar)

WASHINGTON - American drivers paid more for gas, but overall consumer prices rose only modestly in April, a sign that inflation remains mild.

The modest pace of consumer inflation may send a reassuring signal to the Federal Reserve, which is considering how quickly to raise interest rates this year.

The consumer price index rose 2.5 per cent in April from 12 months earlier, the Labor Department said Thursday. It was the sharpest year-over-year increase in 14 months. But excluding the volatile food and energy categories, the so-called core prices ticked up just 0.1 per cent in April and 2.1 per cent from a year earlier.

Declines in the cost of new and used cars, as well as for wireless phone services and cable television, offset higher prices for gas, rents, and medical services.

The overall consumer inflation rate has increased steadily since June, when it measured just 1.6 per cent from a year earlier. Core prices, though, have risen more slowly.

April's mild increase may make the Fed less inclined to accelerate rate hikes. The Fed has signalled that it will raise rates twice more this year, after having done so initially in March, and most economists foresee the next increase in June. Some Fed watchers have been cautioning that any lasting uptick in inflation or in economic growth might spur the Fed to pursue an additional rate increase before year's end.

"After running hotter this year, underlying inflation simmered down in April," said Sal Guatieri, senior economist at BMO Capital Markets. "This will take some pressure off the Fed from stepping up the pace of tightening, but it should not affect the already-high odds of a June rate hike."

Still, higher gas prices are being felt by many Americans, a trend that might restrain spending elsewhere in the months ahead.

Ellen Zentner, an economist at Morgan Stanley, estimates that the increase in gas costs could eat up roughly one-third of the cash that households received from the Trump administration's tax cuts.

At the same time, businesses are paying higher costs for shipping and materials that face import tariffs, such as aluminum and steel.

Gas prices averaged $2.84 a gallon nationwide Thursday, up from $2.66 a month ago, and just $2.34 a year ago. Oil prices have jumped 40 per cent since the end of 2016, driven higher by the expectation that the Trump administration would re-impose sanctions on Iran, the world's fifth-largest oil producer. That decision arrived this week.

Oil output from Venezuela has also fallen. Crude oil neared $71 a barrel Thursday, a price not seen since late 2014.

An inflation gauge that the Fed tends to monitor most closely rose 1.9 per cent in March from a year earlier, nearly matching the Fed's annual inflation target of 2 per cent.

Most economists have forecast that the Fed's inflation measure will top 2 per cent later this year. In its most recent statement, the Fed said it saw its inflation goal as "symmetric," suggesting that it might accept annual price increases modestly above 2 per cent.

Inflation fears on Wall Street have intensified in recent months, with the unemployment rate reaching a 17-year low of 3.9 per cent. And there are some signs that Americans are taking home bigger paychecks. Typically, low unemployment forces companies to pay workers more. Businesses may then increase prices to offset their own rising costs.

But many economists who remain skeptical that inflation will accelerate, even in the current job-rich environment. So far, wages aren't rising in tandem with the healthy economy as they have in the past. And even when wages did rise faster, in the late 1990s, inflation topped 3 per cent but didn't get out of hand.

In addition to gas, housing and medical costs are also rising. Rents have jumped 3.7 per cent from last year, while medical services are up 2.2 per cent.

Economists at Bank of America Merrill Lynch note that price increases aren't yet broadly distributed throughout the economy. The cost of new cars and trucks has fallen 1.6 per cent from a year ago, and clothing costs are up just 0.8 per cent.

In April, used car prices dropped 1.6 per cent, the largest monthly decline since March 2009. Used cars became more expensive after hurricanes last year destroyed thousands of cars in Texas and Florida. Now prices are falling back.

Cable TV prices fell 0.5 per cent in April, the biggest drop in more than seven years, as more Americans opt for streaming video services instead.

"Having been a one-way upward bet for decades, cable TV providers are finally being exposed to market forces," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a forecasting firm.

Food prices have also been mostly tame, rising just 1.4 per cent in the past 12 months. Some products are more expensive: Egg prices have leapt 23 per cent in the past year, the most since an avian flu outbreak in 2017. The jump reflects strong demand around Easter and increased demand overseas. Beef costs are up 4 per cent.

Yet milk prices have fallen 2.3 per cent in the past year, and banana prices have been unchanged.

Mobile phone plans have also gotten cheaper, falling 0.7 per cent in the past year, as unlimited data plans have spread.


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