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The most complicated part of the inflation story is still complicated: Chart of the Week
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The April Consumer Price Index report, released on Wednesday, provided welcome reassurance that inflation is not heating up again.
But services inflation, the stickiest component of the index, once again proved to be the most stubborn holdout.
As our Chart of the Week illustrates, growth in prices for essential goods, food and energy has slowed — or even turned negative (lower prices!). But basic services, which include housing costs and other categories like medical care, rose 3.15% from the previous year.
That number marks a slowdown from March’s 3.18% rate, but is higher than readings seen in December, January and February, the months that gave economists pause over whether inflation was actually on a downward trend.
The main bogeyman of basic services, of course, remains housing. Shelter costs increased 5.5% year-on-year in April, responsible for two-thirds of the increase in core inflation. Combine shelter with energy costs and you’re looking at more than 70% of what drove up prices last month.
The services component, as Bank of America economist Michael Gapen wrote in a note on Friday, may also be receiving some of the spending that flowed from goods. Wage growth remains strong as the job market continues to expand and demand remains high.
Still, Bank of America believes services and shelter will cool as the year goes on.
“We expect further moderation in services inflation as the year progresses, with shelter in place moving down a step in August, and moderation in growth in economic activity weighing on remaining services inflation,” wrote Gapen.
But with a Fed that likely feels it has already miscalculated the severity of the inflation problem, the last thing it wants is a moment of false “Mission Accomplished” aircraft carrier victory.
And as that man said: “Fool me once.”
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