Rising Underlying Inflation Keeps Fed on Rate Hike Path

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Consumer Prices
Lynne Sladky/AP
By Lucia Mutikani

WASHINGTON -- Rising shelter and medical care costs boosted underlying U.S. inflation pressures in April, a welcome sign for the Federal Reserve as it contemplates raising interest rates this year.

The Labor Department said Friday its Consumer Price Index, excluding food and energy, increased 0.3 percent last month. It was the largest rise in the so-called core CPI since January 2013 and followed a 0.2 percent gain in March.

Economists who had expected core inflation to increase 0.2 percent last month said the increase, which also reflected gains in the prices of household furnishings and new and used motor vehicles, should keep the U.S. central bank on track to hike rates before the end of 2015.

%VIRTUAL-pullquote-It will give the Fed greater confidence that inflation will indeed make it to its target in the next couple of years, it increases the odds of faster Fed action.%"It will give the Fed greater confidence that inflation will indeed make it to its target in the next couple of years, it increases the odds of faster Fed action," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

In a speech in Providence, Rhode Island, Fed Chair Janet Yellen said she expected rates to rise this year, adding that the lift-off hinged on a firmer jobs market and signs that inflation was moving toward the Fed's target.

"I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium-term," Yellen said.

The dollar was trading higher against a basket of currencies on the inflation data and Yellen's comments. Prices for U.S. government bonds fell, while U.S. stocks were little changed.

Although slower economic growth in the first half of the year has diminished the chances of a mid-year rate hike, a tightening labor market and rising demand for housing suggest core inflation could continue to push higher this year even if medical costs subside.

Minutes of the Fed's April meeting released Wednesday said "many" policymakers didn't believe that the data by June "would provide sufficient confirmation that the conditions" for raising the key short-term interest rate had been meet.

A recent batch of weak data, including April industrial production and retail sales, has left many economists even doubting the Fed will raise rates in September.

The central bank has kept overnight interest rates near zero since December 2008. It tracks a price measure that is running below core CPI.

In the 12 months through April, core CPI advanced 1.8 percent after a similar gain in March.

"September is still the most likely lift-off date, but July is not out of the question, particularly not if we get another couple of robust rises in core consumer prices in May and June," said Paul Ashworth, chief economist at Capital Economics in Toronto.

Fading Dollar Rally

A fading dollar rally also was seen keeping core inflation on an upward trend. The dollar surged about 15 percent against the currencies of the United States' main trading partners between June last year and mid-March. It has handed back some of those gains and is now up only 10 percent.

"If sustained, that should help weakness in core goods prices continue to moderate," said Ted Wieseman, an economist at Morgan Stanley (MS) in New York.

The overall CPI edged up 0.1 percent last month after increasing 0.2 percent in March. It was held back by a 1.7 percent drop in gasoline prices and no change in food prices. Gasoline prices, however, have since risen.

In the 12 months through April, the CPI fell 0.2 percent, the largest decline since October 2009, after slipping 0.1 percent in March.

Core inflation was lifted by a 0.3 percent increase in shelter costs, which followed a similar gain in March. Shelter inflation is being driven by rising household formation, which is boosting demand for rental accommodation.

The medical care index rose 0.7 percent, the largest rise since January 2007. Household furnishings posted their largest gain since September 2008.

Prices for new and used cars and trucks rose for a third straight month. Airline fares, however, fell, as did apparel prices, which recorded their first drop since December.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Rising Underlying Inflation Keeps Fed on Rate Hike Path
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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