Many a discouraging word for the latest report on consumer price inflation. Not surprisingly, much of the commentary was about what the FOMC is likely to do next. From the Wall Street Journal:
Today's report certainly increases the pressure on the Fed to tighten at its June meeting. In essence, it raises the bar for what kind of economic weakness we need to see over the next six weeks...
--Goldman Sachs Economic Research... if both jobs and wages increase significantly in May, the balance of data will tip in favor of another interest rate increase in June.
--Peter Morici , University of Maryland
Similar sentiments could be found at Reuters...
"Inflation, which is the principal focus of the Fed, is higher than Chairman Bernanke will feel comfortable with," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "It adds to the belief the Fed may raise rates further, and that is a problem for both the bond market and the stock market."
... and at Bloomberg:
"This will keep the pressure on the Fed to maintain their inflation-fighting credentials and increases the odds of a June rate hike,'' said Drew Matus, a senior economist Lehman Brothers Holdings Inc. in New York.
Not everyone is ready to jump into the rate hike parade, however. Again from the Wall Street Journal...
I still believe that the Fed would like to pause in June...
--Stephen Stanley, RBS Greenwich Capital
... and from USAToday:
Gregory Miller, SunTrust Banks' chief economist, said the market is still largely split on whether the Fed will increase the key short-term lending rate by another quarter percentage point when policymakers meet June 29.
"But it won't surprise me if this is when they decide to start the pause and allow data to accumulate," Miller said. Looking at data from the first half of the year, "I suspect what they'll find is energy prices will stop trending higher, and the slower growth numbers will accumulate."
In the Journal article, interesting observations about how housing rents are affecting core inflation measures -- a topic at Calculated Risk as well -- and why the distinction between the CPI and the PCE might be important:
While we think that the homeowners equivalent rent component is likely to boost the core [consumer price index] this year, it is important to note that housing (shelter) has a smaller weight in the core personal consumption [PCE] price index than it does in the core CPI … This is an important point because the FOMC's preferred measure of core inflation is the PCE index rather than the core CPI.
-- Joshua Shapiro, MFR Inc.
Higher rents will put upward pressure on inflation and that this dynamic, once it begins, is fairly sticky. This raises the risk, therefore, of higher inflation readings going forward. If replicated in the PCE price data, core inflation on the Fed's favored measure will move firmly outside Bernanke's comfort zone...
--Bear Stearns U.S. EconomicsThe headline CPI is being driven up by oil prices, and the core, in the last two months, has been pushed above trend by rents. These are changes in the relative price of two components of the CPI, not broad-based inflation, though there will be plenty of people willing to argue the opposite. Rising core inflation need not stop the Fed pausing with the rate hikes.
--Ian Shepherdson, High Frequency Economics
The April PCE report will be released next Friday. Mark your calendar.