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April 11, 2018 Blog 2 min read
Consumer prices rose 2.4% over the past year.

 Consumer price index april

Inflation is rising, but the sharp rise in the year-over-year increase has as much to do with the environment just over a year ago than recent trends. Last April, the consumer price index faced an unusual dip due to falling prices in wireless phone services. The impact of that unusually sharp decline is now rolling out of the data, removing a significant headwind to stronger headline inflation.

For the month, headline inflation declined by 0.1%, a modest surprise for economists that were projecting no change or perhaps a modest increase. Core CPI, which strips out food and energy, rose by 0.2%.

At 2.4%, the Consumer Price Index reached its highest point since March 2017. Core inflation at 2.1% also reached its highest level since February 2017.

The big difference between core and headline readings was in the energy sector, where prices were down 2.8% for the month. Still, with an increase of 7% over the past year, rising energy costs are one of the key drivers in the medium-term uptrend in inflation.

Inflation pressures are not limited to the energy sector though. Tighter job market conditions appear to be filtering through to stronger wage growth, as the competition to attract and retain workers heats up.

In addition, businesses are showing a greater willingness to raise prices – a sign of the strength of the economy and tightening in resources. A recent survey by the National Federation of Independent Business indicates that the highest number of small businesses are eying price increases since 2009.

While prices are already edging higher, other sources of inflation pressure are likely still working their way into the economy, suggesting that inflation pressures could build further. At the same time, the full effect of Fed rate hikes haven’t yet been felt, given the lag between their implementation and impact.

The weaker-than-expected payroll numbers for March notwithstanding, labor market conditions remain quite robust, and inflation gauges are edging higher. The combination of these factors provides ample support for the Fed’s tightening bias, and expectations for further rate increases in the coming months is well founded.

Investors will pay close attention to the Fed’s March meeting minutes set to be published later today. In it could be more telling signs about the pace and magnitude of future rate hikes, though recent testimony from Fed Chairman Jerome Powell points to the commitment of the Fed for a slow and measured pace of rate hikes.

The bottom line is that as the economy continues to grow at a solid pace well into the ninth year of the expansion, inflation pressures should be expected to build, and that appears to be the case.

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