There were few surprises from the frontline inflation readings for the US, which may leverage greater weight on the otherwise battered dollar. According to the Labor Department’s data, prices for goods comprising the broad consumer basket rose 0.3 percent through March, and in turn holding the annualized rate up to a 4.0 percent clip - both as expected. The less volatile core reading (which excludes the very closely monitored fuel and food components that have driven consumer sentiment to multi-decade lows) ticked higher on an annual basis to a 2.4 percent rate.
On a historical basis, these numbers are slightly lower than the highs read at the turn of the year; but from a policy standpoint, price pressures are still well above the Fed’s 2.0 percent target rate. Therefore, policy makers will no doubt continue to allude to upside inflation pressures as they weigh the importance of balancing fianancial markets and economic expansion against the hazard of soaring inflation when making future rate decisions. Looking through the breakdown of the CPI survey, on the other hand, there may be clues that policy makers may be justified in its focused efforts to stabalize markets rather than respond to inflation. Digging into the data, it was clear that both food and energy factors were playing a big role in driving costs. The food component grew 0.2 percent over the month, gasoline prices jumped 1.3 percent and housing related fuel and utilities surged 2.0 percent. While these components impose a very real burden on consumers, many analysts consider the surge to be temporary. What’s more, the pick up in these costs has already dampened consumer spending and will no doubt cool consumption going forward. Fading consumption in the economy’s largest sector will likely lead the Fed to redouble its policy efforts to jump start growth and businesses will eventually lower prices to compete for fewer American dollars.
Written by: John Kicklighter, Currency Analyst for DailyFX.com