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Muddy inflation picture
Overall CPI up less than expected, but rate excluding food and energy tops forecasts.
May 14, 2004: 1:15 PM EDT

NEW YORK (CNN/Money) - A key government measure of inflation, excluding often volatile food and energy prices, was up more than expected in April, although overall retail prices rose by less than Wall Street had forecast.

The so-called "core" consumer price index, which measures retail prices of things other than food and energy, rose 0.3 percent. Economists forecast that it would gain 0.2 percent after a 0.4 percent rise in March. The core CPI is generally the one most closely watched by economists and investors.

But the overall consumer price index, the broader measure of inflation at the retail level, increased 0.2 percent on a seasonally adjusted basis, compared with a 0.5 percent rise in March. Economists surveyed by had expected a 0.3 percent rise.

Energy prices rose 0.1 percent in the month, despite the rising cost of oil, due greatly to seasonal adjustments. Gasoline prices gained 3.7 percent and hit a new high, but after the seasonal adjustment the gas prices showed up in the index as a 0.3 percent decrease.

Food prices, which posted a sharp 1.3 percent increase on the April producer price index, a measure of wholesale prices, were up only 0.2 percent on a seasonally adjusted basis on the CPI.

The inflation report was particularly scrutinized this month for clues as to when the Federal Reserve would raise interest rates. The yield on the 10-year Treasury bond fell slightly to 4.82 percent in morning trading from 4.87 percent before the report, suggesting that investors were somewhat less concerned that the Fed will hike rates as soon as at its June meeting.

Bill Cheney, chief economist for MFC Global Investment Management, said Friday's report did little or nothing to change his thinking about when the Fed will raise interest rates.

While he said the report showed inflation is clearly a stronger factor in the economy than it was a few months ago, he told CNNfn's CNNmoney Morning that the level of inflation is not yet enough to set off alarm bells at the Fed.

"I think the [0.3] on the core is probably a function of energy prices anyway," Cheney said. "It's hard to think of any part of economy not affected by the price of oil."

June or August?

He said he thinks it is still slightly more likely that the Fed will wait until the August meeting to hike rates, rather than act in June, but Fed funds futures on the Chicago Board of Trade indicate that investors are overwhelmingly convinced there will be a June rate increase.

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Cheney said the mixed CPI report means there will be even more attention given to economic data between now and the two-day Fed meeting at the end of June, including the May employment and CPI reports.

"There's a bunch of data they'll have before the June meeting that will determine if they go June or August," said Cheney.

Sung Won Sohn, chief economist for Wells Fargo Bank, said the CPI report makes him think it's more likely the Fed will raise rates in June, although he only puts the chance at 50-50.

He pointed to the annualized core CPI rate of 3.3 percent over the last three months as a sign that inflation is clearly stronger than previously expected, although he agrees that it is not yet a serious threat to the economy.

Consumer Price Index (CPI)
Core CPI

"There's no question there's a bit of groundswell of inflationary pressure coming through, but it's hard to argue we have serious inflation problem," said Sohn.

Sohn said he's not surprised that 10-year bond yields fell on the inflation report, even if he believes a June rate hike is now slightly more likely. He said the fall in bond prices Friday morning is primarily a correction to rates that had gotten too high.

"I think the market got ahead of itself and overreacted to the April employment report," he said about the May 7 report that showed better than expected job growth.  Top of page

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