At a miniumum what the latest (April & March) CPI data suggests is that the chatter about deflation as it relates to the US is misplaced, and that the Fed’s idea of inflation drifting back to target over the M/T has some credibility. It adds to a view that the Fed cannot be completely complacent about price trends, even if pipeline goods price pressures allied to import prices are very soft. The April core at 0.255% rounded was however lifted by a large gain in medical care that is likely part catch-up, and is unlikely to be representative of trend. Hospital services 1.9%. insurance 0.8% on the mth were key large gains in this category. In contrast, the rise in OER of 0.3% for 2 consecutive months looks like it reflects a tight vacancy rate, and is representative of underlying price pressure.
Although not too much should be made of the last couple of months of stronger CPI data, this will only add to pressures for a Sept tightening. Sluggish growth with this kind of price data is consistent with soft productivity supporting higher unit labor costs, and is not great for risk trades, notably the very popular equities trade (although it will take more to create a real squeeze here). The USD obviously likes this number. Key near-term is still whether the EUR/USD break-out/pivot zone in the 1.1050/70 region holds. If it goes, the market will go with it, but for now it should hold into Yellen. I am not expecting much from her. More a reiteration of the FOMC minutes, but key will be what she says about the Q1 GDP seasonality debate. Suspect she is broadly ‘on-side’ for future growth continuing in subdued fashion near 2.5%-ish, but that a tightening labor market is still consistent with Fed tightening later this year.
DB Yellen must be aware of market liquidity for the her speech
CPI sent Fed fund expectations some 5 bps higher . Yellen must be aware that this is not the time to make a key speech given mkt liquidity ahead of a weekend. FI closes early by FX here until 5 pm .. Medical care (+0.7% vs +0.3%) showed a large gain- drug prices were strong. Shelter costs up +0.3% for the second consecutive month and is up 3.0% y/y