The Consumer Price Index (CPI) increased 0.3% in March

Implications: Consumer inflation came in exactly as the consensus expected in March, up 0.3% overall and 0.2% if you exclude food and energy. Energy prices led the way as prices at the pump continued to move higher.  In the past three months, energy prices have risen at an 18.3% annual rate while overall consumer prices are up at a 3.7% annual rate.  However, prices for both energy and the overall CPI were up even faster in the same three months in 2011. As a result, year-ago price comparisons have actually been decelerating. Back in October, consumer prices were up 3.6% from a year ago; now prices are up 2.7% from a year ago.  This deceleration may continue for another month or so, which means prices will still be rising, but not as quickly as they were the same time a year ago.  However, do not expect the respite from higher inflation to last.  "Core" inflation, which excludes food and energy, has continued to trend upward. Back in October, core prices were up 2.1% from a year ago; now they're up 2.3%, which is above the Federal Reserve's target of 2%. Meanwhile, monetary policy is very loose and housing costs (which are measured by rents, not asset values) are rising.  Owners' equivalent rent was up 0.2% in March and is up 2% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead.  With loose monetary policy and housing costs accelerating, it's hard to see core inflation getting back down to the Fed's 2% target anytime soon.  On the earnings front, "real" (inflation-adjusted) wages per hour were down 0.1% in March.  Although these earnings are down 0.6% from a year ago, the number of hours worked is up 2.5%, giving consumers more purchasing power.  No justification here for a third round of quantitative easing.

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Posted on Friday, April 13, 2012 @ 11:09 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.