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Much like yesterday’s companion report from the U.S. Department of Labor on producer (wholesale) prices, this morning’s release of consumer prices for the month of April made for another tame reading on inflation. Specifically, the report showed that the Consumer Price Index decreased 0.4% on a seasonally adjusted basis last month.

A closer look reveals that the primary reason for the pullback in prices was a decline in gasoline costs. Indeed, the gasoline index fell 8.1% last month, leading to a sharp 4.3% decrease in energy costs for the consumer. Meanwhile, the food index was up nominally, rising 0.2% last month. The index for all items, excluding the volatile energy and food components, rose a rather modest 0.1%, the same increase as in March. Overall, the 12-month change in the index for all items was 1.1% in April, the smallest 12-month increase since November, 2010.

The latest benign reading on inflation is also well below the Federal Reserve’s target level. Thus, the central bank should have no problem continuing its aggressive monetary actions in an effort to stimulate the economy. The Fed’s dual mandate calls for stable prices—which now has been the case for quite some time—and maximum employment. The latter issue is still a major concern. Just this morning, the Department of Labor reported that the advance figure for seasonally adjusted initial jobless claims was 360,000, an increase of 32,000 from the previous week's revised figure, and the highest reading in six weeks. This should keep the lead bank active in the bond market despite some emerging thoughts in recent weeks that the Fed will begin to gradually wind down its aggressive monetary policies.

The Federal Reserve is buying about $40 million of both short- and long-term notes per month in an effort to stimulate the economy and drive down the unemployment rate.  If nothing else, the latest tame reading on inflation puts no additional pressure on the Federal Reserve to raise interest rates. The lead bank plans to keep rates at their current level for the foreseeable future, perhaps even until the early stages of 2015.

All in all, the latest reading on consumer prices shows that inflation is not a major issue right now for the central bank. This data, along with the tame reading on producer prices, should allow the Federal Reserve to continue its accommodative monetary policies. Investors also should note that at 8:30 A.M. (EDT) today, the Commerce Department reported mostly encouraging data on new residential construction, including a sharp rise in building permits, which is viewed as a good gauge of future building activity. Our sense is that historically low lending rates, the product of the Federal Reserve’s aggressive monetary actions, are bringing more prospective buyers into the market. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.