Inflation Heats Up

The Consumer Price Index (CPI) rose 0.2% in April compared to May; higher energy prices added to inflation during the month. Get ready for more of that, given the recent spike in oil prices. Shelter prices also came in a bit warmer than expected. [We have heard some complaints that the government may be undercounting the upward pressure on inflation from rents.] The CPI rose 2.5% on a year-over-year basis, which is well within the Federal Reserve target range for this index. The Fed has underscored a willingness to overshoot on inflation as unemployment continues to fall in order to allow for more inclusive growth and stronger wage gains.

The core (nonfood and energy) portion of the index rose 0.1%. Shelter and hospital costs were the primary drivers of those gains. Airfares actually fell in April but are likely to rise as the higher costs of energy work their way through the economy. The damper on overall inflation from lower wireless rates last year for smartphones was in fact transitory. Members of the Federal Reserve who argued that will feel vindicated. Core CPI edged up a tick to a 2.1% year-over-year pace.

Bottom Line
Inflation is moving back up, which gives the Fed more reason to raise rates again in June. There will then be pressure to wait for additional wage gains before hiking rates again. That will put the Fed back into the position of being data dependent in the second half of the year. We are confident the wage gains will materialize.

About the author
Diane Swonk Diane Swonk
Chief economist
Twitter: @DianeSwonk

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