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Federal Reserve Chairman Jerome Powell’s assertion that too-low U.S. inflation will prove transitory hinges largely on what Americans pay for two basic needs: clothing and shelter.
Those two categories will play a key role in the projected pickup in consumer-price index data due Friday, particularly the core figures that exclude food and energy costs. This is poised for a further boost in coming months should President Donald Trump raise tariffs on Chinese goods this week, as he’s threatened.
Apparel accounts for just over 3% of the CPI, yet in March the category plummeted by the most since 1949 and dragged down the overall index after the Labor Department began using new methodology.
Shelter costs, which amount to one-third of total CPI, rose in March by the most since 2017 and likely remained firm last month. Yet a major portion -- rent of primary residence -- jumped in March by the most since 2007 on an unrounded basis, a pop that Bank of America Corp (NYSE:BAC). economists warn could reverse and weigh on inflation in April.
Even with a pickup amid rebounding gasoline costs, it will probably be a while before inflation breaks out substantially. The price reports may actually provide some ammunition for both Powell and financial markets. Investors see inflation as so low that they’re still pricing in a Fed interest-rate cut within the next year.
This week’s inflation figures are likely to “reinforce the notion the Fed needs to stay on the sidelines and continue to analyze the data,” said Lindsey Piegza, chief economist at Stifel Nicolaus & Co. Even if businesses are confronting higher costs, they’re more likely to try boosting productivity than passing the burden on to consumers, she said.
What Bloomberg’s Economists Say
“Inflation will accelerate as the unemployment rate continues to dip further below its neutral level -- but this may not be more evident until the economy moves beyond an inventory overhang in the latter half of this year.”-- Carl Riccadonna and Yelena Shulyatyeva, economists
Producer-price figures, out Thursday, offered an initial read on inflation pressures in April. The annual index excluding food and energy costs came in below forecasts, missing projections for an acceleration. At the same time, some economists said components that are incorporated into the Fed’s preferred inflation gauge tracking personal consumption, like portfolio management prices, were relatively strong.
Core CPI is forecast to rise 2.1% from a year earlier after a 2% March gain that missed projections. That would be the first pickup since November.
“Those transitory factors that have been weighing on inflation since the beginning of the year are starting to work their way through,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc. “You’ll start to see inflation firm. For CPI, rents matter and you’ll see that firm this year.”
Complicating the picture is the sudden shift in trade talks, with tariffs set to rise Friday as Chinese and U.S. officials continue negotiations. During Powell’s press conference last week, he cited what at the time was a more positive outlook for the talks as supporting the Fed’s brighter assessment of the economy.
New tariffs could boost inflation while weighing on growth, economists say. The good news for consumers is it will probably take a few months before they see price changes.
Still, “just like that, here’s an upside risk” on inflation, said Sarah House, senior economist at Wells Fargo (NYSE:WFC) & Co. “We’d seen a lot of calm in the last couple months and a lot of optimism regarding some sort of trade deal, so I think businesses took that as the reason they didn’t have to press ahead with price increases as initially feared.”
(Updates with PPI report in seventh paragraph.)