U.S. consumer prices rise slightly; labor market tightening

WASHINGTON (Reuters) – U.S. consumer prices rose less than expected in April, suggesting that inflation was increasing at a moderate pace, which could allow the Federal Reserve to continue gradually raising interest rates.

A sign seeking workers for Home Depot is seen at a job fair in Golden, Colorado, June 7, 2017. REUTERS/Rick Wilking

But with the labor market tightening and oil prices rising after President Donald Trump on Tuesday pulled the United States out of an international nuclear deal, promising to restore stiff sanctions on Iran, price pressures are expected to accelerate in the coming months.

Inflation is flirting with the U.S. central bank’s 2 percent target. Policymakers have in recent days signaled they would not be too concerned if inflation overshot the target, reiterating what the Fed said in its statement last week.

The Labor Department said its Consumer Price Index rose 0.2 percent in April as increases in the cost of gasoline and rents were tempered by a drop in motor vehicle prices. The CPI had slipped 0.1 percent in March.

“The sources of the weakness in last month’s reading do not suggest the onset of a trend shift lower,” said Michael Feroli, an economist at JPMorgan in New York. “Today’s number would not deter the Fed from hiking (interest rates) again next month.”

In the 12 months through April, the CPI increased 2.5 percent, the biggest gain since February 2017. That followed a 2.4 percent rise in the year to March.

Excluding the volatile food and energy components, the CPI edged up 0.1 percent after two successive monthly increases of 0.2 percent. The so-called core CPI rose 2.1 percent year-on-year in April, matching March’s increase.

Economists had forecast the CPI rebounding 0.3 percent in April and the core CPI climbing 0.2 percent.

The personal consumption expenditures price index excluding food and energy, which is the Fed’s preferred inflation measure, accelerated 1.9 percent year-on-year in March, as last year’s big declines in the price of cell phone service plans dropped out of the calculation.

Economists expect the core PCE price index, which had increased 1.6 percent in February, to breach the 2 percent target in May.

In their policy statement last week, Fed officials said they expected annual inflation to run close to the “symmetric” 2 percent target over the medium term. The central bank left interest rates unchanged last week.

The Fed hiked rates in March and has signaled at least two more increases for this year.

Stocks on Wall Street were trading higher while U.S. Treasury yields fell. The dollar .DXY slipped against a basket of currencies.


In another report on Thursday, the Labor Department’s first-time applications for state unemployment benefits were unchanged at a seasonally adjusted 211,000 for the week ended May 5. Claims dropped to 209,000 during the week ended April 21, which was the lowest level since December 1969.

The labor market is considered to be near or at full employment, with the unemployment rate close to a 17-1/2-year low of 3.9 percent. That has led to a slowdown in job growth as employers struggle to find skilled workers. A government report on Tuesday showed job openings rising to a record 6.6 million in March.

Competition for workers is expected to push up wage increases, which have remained moderate.

“It is not enough to say that companies continue to be reluctant to lay off workers, they are becoming increasingly reluctant to do so,” said John Ryding, chief economist at RDQ Economics in New York.

“The only thing missing is a faster growth rate of labor compensation, but we believe that this is coming.”

Strong wage growth and higher gasoline prices could fan inflation pressures. Last month, gasoline prices rebounded 3.0 percent after tumbling 4.9 percent in March. Crude oil prices jumped to 3-1/2-year highs on Wednesday following Trump’s decision to exit the Iran deal.

Food prices rose 0.3 percent last month, the largest increase in a year, after nudging up 0.1 percent in March.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.3 percent last month after a similar gain in March.

Healthcare cost increases slowed, edging up 0.1 percent after advancing 0.4 percent in March. Prices for used cars and trucks tumbled 1.6 percent in April, the largest drop since March 2009.

The cost of recreation fell 0.4 percent last month, the biggest decline since December 2009. There were also decreases in the cost of airline tickets, new motor vehicles and communications. The cost of motor vehicle insurance fell for the first time in a year.

Apparel prices rose and costs of household furniture increased 0.5 percent last month, the largest in three years.

Reporting by Lucia Mutikani; Editing by Paul Simao and Bill Berkrot

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