CPI Helped by Wages

The camp believing that a moderation in wages will shepherd a moderation in inflation received a boost today with the release of the April consumer price index, which showed a very benign 0.1% increase in core prices and a 0.3% gain in overall prices. Both readings were a tenth of a percentage point lower than expected. The unrounded gain in the core was +0.1037, meaning that the 0.1% gain was not the result of a deep rounding.

Difficult to reconcile is the flat reading on energy prices, although some of it was almost certainly related to seasonal adjustments to gasoline prices, which were reported down 2%. The actual increase in gasoline prices was 5.6%. Obviously, this means that gasoline tends to rise by 7.6% in April, but because they rose less than that (5.6%), they were reported at -2.0%.

The impact of seasonal adjustments is notable in the first half of the year. Market News reports that "the Bureau of Labor Statistics drew attention to the fact that there was a larger disparity between seasonally adjusted and unadjusted prices in H1. Eventually these will have to converge -- possibly raising up the CPI's level.

The benign reading on core consumer prices occurred despite a 0.3% increase in the housing component, which accounts for 42.4% of the CPI. That's because the non-energy parts of the housing component (i.e., everything but household fuels and utilities costs) showed relatively benign increases. In particular, the owners-equivalent rent component, which accounts for 23.9% of the CPI and close to 30% of core prices, increased just 0.2%.

Alleviating the upward pressure on consumer prices is the recent moderation in labor costs, which account for about 70% of the inflation process.

In the first quarter of this year, the employment cost index increased just 0.7%, its least in two years. In April, average hourly earnings increased just 0.1% after five consecutive increases of 0.3%, bringing the year-over-year gain to 3.4%, a two-year low and nine-tenths of a percentage point below the December 2006 high. The 15-year average is 3.3%.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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