Two Human Basics to Give Powell First Hint on Transitory Prices

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Federal Reserve Chairman Jerome Powell’s assertion that too-low U.S. 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 Friday, 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.

Price Pickup

U.S. core inflation is expected to climb in April for the first time since November

Source: Bureau of Labor Statistics, Bloomberg survey

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 Labor 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 analyze 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.

What Bloomberg’s Economists Say

“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.”
— Carl Riccadonna and Yelena Shulyatyeva, economists

Producer-price figures out Thursday will give 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.

The next day, 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.”

Read more: Powell’s ‘Transitory’ Factors Mask Full Scope of Inflation Drop

Complicating the picture is the sudden shift in trade talks, with tariffs set to rise Friday as Chinese and U.S. 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.

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