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April’s Consumer Price Index report Wednesday provided welcome reassurance that inflation isn’t heating back up.
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, core goods, food, and energy price growth have declined — or even gone negative (lower prices!). But core services, which includes housing costs and other categories like medical care, rose 3.15% over the prior year.
That figure marks a slowdown from March’s 3.18% rate, but it’s 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 bugaboo for core services, of course, remains housing. Shelter costs rose 5.5% over the prior year in April, accounting for two-thirds of the increase in core inflation. Combine shelter with energy costs, and you’re looking at more than 70% of what pushed prices higher last month.
The services component, as Bank of America economist Michael Gapen wrote in a note Friday, may also be receiving some of the spending that has flowed out of goods. Wage growth remains strong as the labor market continues to expand and demand remains high.
Still, Bank of America does believe that services and shelter will cool as the year goes on.
“We expect further moderation in services inflation as the year progresses, with shelter taking a step lower in August, and moderating growth in economic activity weighing on remaining services inflation,” Gapen wrote.
But with a Fed that likely feels as if it miscalculated the severity of the inflation problem once already, the last thing it wants is a “Mission Accomplished” aircraft carrier moment of false victory.
And as that man said, “Fool me once.”
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