There is also an increasing “solidity” to recent inflation outturns. At the headline inflation level food prices are rising at a solid clip, posting 0.4% m/m increases in both February and March. That’s on the back of the extreme drought conditions prevailing on the west coast which is impacting on prices for fruit, vegetables and dairy products.
We should be more interested in core inflation. Prices increases there have looked a little more solid recently too with rising prices for apparel, medical care and airline fares. But two-thirds of the 0.2% m/m increase in March came from rising shelter costs along with rents and owner occupied rents. The shelter index is up 2.7% over the past year – its largest annual rate in six years. We expect the continued improvement in the housing to put a solid floor (the pun was unintentional) under future core inflation outcomes.
While the FOMC has dropped its quantitative guidance with respect to the unemployment rate, we still look to the labour market to provide the clearest and earliest signs of generalised inflationary pressure. With demand expected to continue to improve in the period ahead hiring will also pick up, as will wage growth.