U.S. Consumer Prices Reflect Sharp Decrease In Inflation

Consumer prices rose in April by 0.2% over the month, but CPI inflation decreased for the first time since September 2012 (to 2.4%). It may increase in the coming months. However inflation should increase less than previously expected in line with the fall in energy prices.

Consumer prices rose in April by 0.2% over the month, but CPI inflation decreased for the first time since September 2012 (to 2.4%, after 2.8% y/y).

According to the ONS, the largest upward pressure came from food and non-alcoholic beverages (+4.6% y/y in April). By contrast downward pressures came principally from transport costs (-0.1% y/y), notably from motor fuels and air fares. Core inflation also sharply dropped (to 2%, after 2.4% in March).

In February, ONS launched two new measures of consumer price inflation for the first time; CPIH, which includes owner occupiers’ housing costs and RPIJ, which is an improved variant of the Retail Prices Index (RPI) calculated using formulae that meet international standards. CPIH decreased in April (to 2.2%). It grew at a slower pace than CPI in line with a lower increase in owner occupiers’ housing costs than overall inflation for other consumer goods and services. RPIJ fell to 2.3%, down from 2.7% in March.

Inflation, which has remained high since a few months, reached its lowest level since September 2012. It may increase in the coming months, as there should be still positive pressures from the fall in sterling at the beginning of the year. Above all, the rise in administrated and regulated prices should underpin inflation. Inflation will remain well above the central bank’s 2% target, which remains the BoE’s primary target set by the government, but inflation should increase less than previously expected in line with the fall in energy prices. There should also be downward pressure from labour costs as April regular pay growth excluding bonuses recorded their lowest increase since records began in 2001 (+0.8% y/y in the quarter, after +1% y/y). Despite inflation remaining above 2%, the government offered more flexibility to the BoE to pursue an accommodative policy until the economic situation has significantly improved at the occasion of the 2013 budget statement of 20 March. The question remains open whether the BoE will use this new leeway.

BY Catherine STEPHAN

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