CPI Rings Inflation Alarm

The figures are not what economists expected, but they still add up to higher inflation.
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The latest government report on consumer prices looks a bit confusing at first glance, as the core rate for inflation rose more than the headline rate. That is counter to recent trends, but it's clearly another reason for the

Fed

to raise interest rates at its June 29-30 policy meeting.

Because the core rate doesn't include the volatile categories of energy and food, both of which have posted substantial recent increases, its higher-than-expected 0.3% April increase looks out of synch with the 0.2% overall price increase, which was lower than Wall Street forecasts.

Economists who parse the consumer price reports say that statistics sometimes yield odd results for technical reasons, and this is especially true in the way the government accounts for seasonal adjustments to energy prices. Though energy prices have been rising, last month's figures were adjusted in a way that made the core rate pass the overall consumer price index, they said.

Scott Brown, senior economist at Raymond James and Associates, says that statistical adjustments turned a 3.7% jump in gasoline prices into a 0.3% decrease to account for a pattern of seasonally increased demand. Gasoline prices are up 11% on a year-on-year basis. Prices spike with the onset of summer, and the numbers need to reflect that, he says.

The report said energy prices rose just 0.1% in April, which seemed all the more perplexing given recent history. While the CPI increased at an average rate of 0.4% in the first three months of this year, energy prices rose sharply, gaining a minimum of 1.7% during that period, with a 4.7% spike in January.

In addition, April's PPI report Thursday showed overall energy prices for intermediate goods rose 1.8% in April, after smaller increases of 0.5% in March, 0.6% in February and a whopping 2.7% spike in January.

William Dudley, chief U.S. economist at Goldman Sachs, says higher commodity prices are a factor, though that doesn't directly show up in the core figures. "Higher commodity prices, including energy, are putting some temporary upward pressure on core measures of inflation," he wrote in his Friday market commentary.

And while the pace of energy price growth slowed -- for whatever reason -- other categories picked up. Both housing and medical costs rose 0.4%. Education and communications increased 0.3%.

Simpler technical factors explain changes to the core figure itself, which rose 0.4% in March and 0.2% in the prior two months.

In this case, says Robert Barbera, chief economist at Hoenig & Co., the numbers don't lie, but they may exaggerate the situation.

"With the core number ... the number is rounded up by the skin of your teeth," he says. The actual core figure was 0.26% last month, and 0.36% for March. "In each case, the number was worse than the underlying reality," adds Barbera.

He says that rather than worrying about rising inflation, it's better to focus on signs that the economy is growing enough to support higher prices and is no longer in danger of the sort of deflationary spiral that Fed Chairman Alan Greenspan had worried about until recently and that crippled Japan for most of the past decade.

For now, Barbera says that prices are rising "at an almost ideal rate" because the volatility of food and energy costs is offset by low increases in many consumer goods, from apparel to electronics.

"At the pump it's unnerving, but it's still true that at Wal-Mart it's almost improbably happy," he says. "That said, there's a clear, unambiguous message coming out of this data; we have avoided the deflation trap and that story is over."

The energy story, however, definitely is not, especially with the May rally in crude oil and gasoline futures, which has driven prices to record highs.

"That's going to be a factor in next month's CPI," says Kathryn Kobe, senior economist at Economic Consulting Services in Washington, D.C. "That doesn't mean the markets aren't taking it into account now. Prices don't always go up smoothly, and people tend not to notice unless we get a pretty big jump."