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Inflation cool at the core
Price gauge excluding food and energy flat in April; overall rate of increase slower than March.
May 18, 2005: 11:09 AM EDT
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NEW YORK (CNN/Money) - Consumer prices excluding food and energy did not rise in April, the government reported Wednesday, a reading that helped soothe inflation jitters on Wall Street.

The Labor Department said its Consumer Price Index, the government's main inflation gauge, rose 0.5 percent in April, compared with a 0.6 percent rise in March. Economists surveyed by had forecast a 0.4 percent rise.

But the so-called core CPI, which strips out often-volatile food and energy prices, was unchanged after rising 0.4 percent the prior month. Economists had forecast the core rate would be up 0.2 percent. It was the first time since November 2003 that the core number was unchanged.

"This is very good news," said Anthony Chan, senior economist with J.P. Morgan Asset Management. "Workers may end up getting the purchasing power they've been lacking so far. While overall prices are still rising, we have good reason to believe energy prices will be going down."

The overall CPI is up 3.5 percent over the last 12 months, more than the rise in hourly or weekly wages, meaning that the average employee has been losing ground to inflation.

Investors also welcomed the report, driving stock prices higher in early trading. Treasury bond prices also rose, driving the yield on the 10-year note lower, as investors bet the mild reading would put less upward pressure on interest rates.

In its report, the department said energy prices jumped 4.5 percent last month, while food prices edged up 0.7 percent, both showing faster gains than in March.

But prices for many other items, including housing, clothing and medical costs, showed inflation pressures lessening. Clothing prices actually fell 0.6 percent.

And while energy prices rose last month, crude oil futures have since dropped significantly after hitting record highs in March.

The report helped to dampen recent worries that the economy was facing both higher prices and slower growth, dubbed "stagflation" by economists.

"The economy may stagnate but it's not going to inflate," said Mark Vitner, senior economist with Wachovia Securities. "The core rate of inflation probably peaked in March."

Wile the inflation outlook is more encouraging, he said, that's partly due to expectations for slower economic growth both at home and abroad.

"We're already seeing growth slow, and the commodity prices are backing off because of that," he said.

Chan said the report's lack of inflationary pressure probably won't be enough to cause the Federal Reserve to pause in its campaign of quarter-point interest rate increases. But it's still hopeful for those concerned about rising interest rates.

"It provides more ammunition for the doves arguing for more moderation, and takes leverage away from the hawks arguing for (a bigger, half-percentage point) hike," said Chan.

Fed policy-makers have raised their target for a key short-term interest rate a quarter-point at each of their last eight meetings, as the central bank seeks to ward off inflation.

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