CHART OF THE WEEK
Just as inflation appeared to be picking up, data from both March and April seem to call the upward trend into question. In a rare occurrence, March’s inflation excluding food and energy fell and, contrary to expectations, April’s number failed to compensate at a rather weak +0.1%.
This is the smallest change over two months since the start of 2010. As a result, 12-month underlying inflation has slowed to +1.9%, its lowest level since the end of 2015.
The soft inflation reading is all the more surprising as no specific element of the goods and services basket is responsible. Nonetheless, over the two-month period, the price of communications services fell sharply and health services prices also slowed. Housing prices, a significant component in the consumer price index, dropped after rising regularly since 2013. The next few months will provide a clearer picture, but it is unlikely that this weakness portends a new downward trend.
The inflation data is unlikely to deter the Fed from raising rates on June 14th, as the labour market has not sent any negative signals. However, rhetoric accompanying the decision may find itself adjusted accordingly.
The opinion expressed above is dated May 15th, 2017, and is liable to change.
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