Benign Inflation Continues - May 15, 2012
This morning at 8:30 A.M. (EDT), we received a key report on the U.S. economy when the Department of Labor released data on consumer prices for the month of April. Specifically, the Consumer Price Index for all urban consumers was unchanged in April on a seasonally adjusted basis—the consensus expectation called for such a reading.
The data was another rather tame reading on inflation. Excluding the volatile energy and food components, core consumer prices increased a modest 0.2% last month, matching the increase in March. Core prices rose 2.3% in the 12 months that ended in April, which is close to the Federal Reserve's inflation target of 2%. It also gives further credence to the central bank’s current stance of holding interest rates steady for the foreseeable future. The tame inflationary environment also keeps the possibility of some additional bond buying (i.e., QE3) in play if further economic stimulus were to be required. However, the lead bank has shown no desire of late to go that route—especially with recent economic data indicating that the U.S. economy is growing, albeit at a very measured pace right now. We will get more insight into the Fed’s thinking tomorrow at 2:00 P.M. (EDT), with the release of the minutes from the latest Federal Open Market Committee meeting.
Another very encouraging aspect of the latest report was the 2.6% decline in the gasoline index for April. In addition to the pullback in gasoline prices, natural gas and fuel oil costs also declined last month. The spike in gasoline prices has been a big concern for the Federal Reserve. If moderation in energy prices were to continue in the coming months, it should boost the consumer’s disposable income. Such a scenario would likely have a positive effect on the services sector, which accounts for roughly two-thirds of the nation’s economic output.
All in all, the latest data on consumer prices were encouraging. This, combined with last week’s companion report showing that inflationary pressures aren't increasing much at the wholesale level, is good news for both producers and consumers. It may also allow consumers to spend more on travel and accommodations during the fast-approaching peak vacation season, which would be welcome news for a domestic economy that is currently still only growing at a rather pedestrian pace.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.