CPI Falls 0.4 Percent While Real Hourly Wages Advance 0.5 Percent

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. This was the first consecutive decline in the index since 2008; headline prices fell 0.2 percent in March. The decline was a bigger drop than expected, as analysts forecast a decrease of 0.3 percent. As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April. The index for all items less food and energy (the “core” measure of inflation) increased 0.1 percent in April, the same increase as in March, but less than the 0.2 percent analysts expected. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation. The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. In March, prices climbed 1.5 percent from a year earlier. The index for all items less food and energy increased 1.7 percent over the 12 months through April; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent. Lower gas prices can help consumers spend more in other areas, so disinflation caused by falling energy costs is less of a concern to the Fed than falling inflation more broadly of finished goods and services. The drop in the headline inflation measure may reinforce views that the Fed could continue its bond-buying program longer, as inflation is below its two percent target, but note that the increase in core prices is closer to its target range. Of course, the Fed's preferred gauge of inflation is not the CPI, but rather the price index tied to personal consumption and expenditures tabulated by the Bureau of Economic Analysis at the Department of Commerce. Part of the difference between the two price indices relates to the weighting of products and services in the two measures. That measure advanced 1 percent in the year through March. At the same time as the CPI is released, the BLS also released a report on real earnings. Here, we see that real average hourly earnings for all employees increased 0.5 percent from March to April, seasonally adjusted. This result stems from an increase of 0.2 percent in average hourly earnings combined with a decrease of 0.4 percent in the Consumer Price Index. Real average weekly earnings were unchanged over the month due to the increase in real average hourly earnings being offset by a 0.6 percent decrease in the average workweek. Real average hourly earnings rose 0.8 percent, seasonally adjusted, from April 2012 to April 2013. The increase in real average hourly earnings, combined with a 0.3 percent decrease in the average workweek, resulted in a 0.5 percent increase in real average weekly earnings over the past year. This lack of significant real wage gains may not aid consumer spending on a per-household basis, though an increase in employment can help consumer spending in the aggregate.