Two human basics to give Powell first hint on transitory prices

Federal Reserve chairman Jerome Powell’s assertion that too-low US 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 today, 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 Labour 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 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 analyse 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.“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,” said Carl Riccadonna and Yelena Shulyatyeva, Bloomberg economists.Producer-price figures out yesterday gave an initial read on inflation-pipeline pressures during April, with economists expecting the first acceleration in six months in the annual index excluding food and energy costs.Today, the 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 today as Chinese and US 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 & 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.”