Core Inflation Moves Higher, Fed is Watching

It takes some digging, but inflation data released Friday supports forecasts that the Federal Reserve will start lifting interest rates later this year, possibly as early as September.

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The key figure is what’s known as the core Consumer Price Index, an economic indicator that gauges how much the prices have changed on an array of consumer products excluding food and energy because those costs are often volatile.

The core CPI has risen 1.8% in the past 12 months, just below the Fed’s target rate of 2%.

Analysts say the Fed is looking closely at that core CPI figure as it determines when to announce a rate liftoff.

“The latest inflation readings indicate subdued prices pressures, but core inflation remains well-anchored,” analysts at Oxford Economics said in a research note. “We expect headline inflation will rise at a stronger pace in the latter of this year as the effects from a stronger dollar and lower oil price dissipate. As such, we expect the Fed will move ahead with rate-liftoff in September.”

The Fed has essentially ruled out any shift in interest rates at their upcoming June meeting, having decided at their meeting last month that a weak first quarter caused by another severe winter and other “transitory” issues including a dock strike in California that disrupted supply chains, justified a delay.

Overall, the broader CPI numbers for April showed little upward momentum. The Labor Department said its CPI rose 0.1% last month after increasing 0.2% in March. In the 12 months through April, the CPI fell 0.2%, the largest decline since October 2009, after dipping 0.1% in March.

Economists had forecast the CPI edging up 0.1% from March and dipping 0.1% from a year ago.

The Fed has targeted two indicators for helping them determine when to raise rates for the first time in nearly a decade after holding them at near-zero since December 2008. The first, unemployment, has reached its target goal of 5.2%-5.6%, but the second, a 2% annual inflation rate, has proven more difficult to achieve.

Weak wage growth has been blamed for keeping inflation below the Fed’s target rate, a situation that has puzzled economists because monthly employment gains have been strong for the past year and the unemployment rate has dropped significantly.

But the Fed has expressed confidence that continued momentum in U.S. labor markets will ease slack in the job market and eventually push wages higher. When consumers start making more money they will increase their spending and lift demand for goods, which will raise prices.

The core CPI number released Friday is an indication that is starting to happen.