U.S. Consumer Prices Dip 0.4% in April as Gasoline Prices Fall Again

• US consumer prices dropped 0.4% in April, building on a 0.2% decline in March. Market expectations were for a slightly smaller 0.3% decline. The year-over-year rate of increase eased to 1.1% from 1.5% in March.
• The decline in the overall CPI largely reflected an outsized 4.3% drop in energy prices as gasoline prices fell sharply again in April. Food prices provided some offset, inching up 0.2% following an unchanged reading in March.
• Excluding the food and energy components, core CPI increased a modest 0.1%, slightly below market expectations for a 0.2% gain and matching the 0.1% increase in March. With the modest monthly gain, the year-over-year rate of increase in core prices dipped to 1.7% from 1.9% in March.
• The rate of growth in the overall CPI has been pushed lower by outsized weakness in gasoline prices in recent months; however, even excluding the energy component there is little evidence of price pressure in the system with the annual pace of core price growth slipping lower to a level further below the Federal Reserve’s 2% inflation target. The lack of underlying inflationary pressures continues to provide the Fed with flexibility to focus on the labour market half of its mandate. Our forecast assumes that this will result in the central bank continuing asset purchases through the end of this year and maintaining fed funds within the current range of 0% to 0.25% likely into 2015.

Consumer prices declined 0.4% in April. This marked a second consecutive monthly decline following a 0.2% dip in March and pushed the year-over-year rate of increase down to 1.1%, the lowest annual pace of price growth since November 2010, from 1.5% in March. The decline in the headline inflation rate largely resulted from an outsized 4.3% monthly decline in energy prices as gasoline prices plunged 8.1%, building on the already large 4.4% decline in March. This left gasoline prices 8.3% below their level last year at this time. Food prices provided some modest offset, rising 0.2%. Excluding both the energy and food components, core prices continued to rise, although by a modest 0.1% that matched the pace of increase in March. The modest monthly increase resulted in the year-over-year rate of growth in the core measure dipping to 1.7% from 1.9% in March.

The rate of growth in the overall CPI has been pushed lower in recent months by outsized weakness in gasoline prices. By freeing up household incomes for other purchases, this has likely provided some welcome support to consumer spending, offsetting in part the increase in payroll taxes that took effect in January. Gasoline prices appear to have stabilized to this point in May and may move somewhat higher in coming months; however, even excluding the energy component, there is little evidence of price pressure in the system with the annual pace of core price growth in April slipping to a level that is further modestly below the Federal Reserve’s stated 2% inflation target. The lack of underlying inflationary pressures continues to provide the Fed with flexibility to focus on the labour market half of its mandate. Our forecast assumes that this will result in the central bank continuing asset purchases through the end of this year and maintaining fed funds within the current range of 0% to 0.25% likely into 2015.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

To subscribe or visit go to:  http://www.riskcenter.com

http://riskcenter.com/articles/story/view_story?story=99915377