The slowdown in underlying inflation may soon be over, but a sharp reversal is unlikely. Oil prices have turned up, while the decline in underlying import prices may be ending. Base effects make a further decline in the y/y for the Core CPI and Core PPI Excluding Trade Services difficult to achieve in the next report. And, evidence is accumulating pointing to a speedup in economic growth in Q219. There are reasons to think, though, that the next round of evidence on labor costs will remain benign.
The underlying measures of the CPI and PPI both have slowed (see table below). Both are down to 2.0% on a y/y basis in March. The Core PPI Excluding Trade Services began its slowdown earlier, in Q418. Arguably, the PPI leads the CPI, and is not yet pointing to a speedup. Nevertheless, it will be difficult for both to slow further in April. The March slowdown in the Core CPI resulted largely from a drop in apparel prices that will not likely be repeated to the same extent in April (although they still could decline due to bi-monthly sampling and the late Easter). Base effects work against a further decline in the y/y for both the Core CPI and Core PPI Ex Trade Services. Each has to rise by less than 0.1% m/m to lower its y/y in April.
Import Prices Excluding Food and Fuel (oil and natural gas) should become less of a drag on US domestic inflation ahead. They started to slow in Q318, falling below last year's level beginning in January 2019. Much of the weakening came from China, where companies apparently cut prices to offset the impact of tariffs. However, prices of imports from China turned up m/m slightly in March, which could mean the bulk of the weakening in import prices is behind us if not coming to an end. While a stronger dollar likely played a role in import price weakening, it has stabilized and, in particular, has come off its highs versus the Chinese yuan. (Tariffs are not included in the Import Price data). To be sure, global economic softness could exert further downward pressure on prices. And, relatively faster US economic growth and possibly tariffs against the EU (as threatened by Trump) would likely lift the dollar ahead. So, import prices are not likely to reverse sharply, if at all.
Oil prices affect the underlying measures of inflation to the extent they are passed through to prices of other goods and services. Airfare fares, for example, tend to be impacted by swings in oil prices. The latest run-up in oil prices still has not been enough to put them above their levels in April 2018, however. So, the y/y looks like it should remain negative this month, perhaps to about -6.0%.
Labor Costs are benign. The broadest measures -- Compensation/Hour and Unit Labor Costs (Compensation/Hour adjusted for Productivity) -- have slowed. Compensation/Hour Growth was down to 2.8% (Q4/Q4) in 2018 from 3.2% in 2017. Productivity sped up to 1.8% from 1.0%. So Unit Labor Costs slowed to 1.0% from 2.2%. Base effects tilt the odds towards a further slowdown in ULC in Q119. Although Average Hourly Earnings sped up since September 2018, this is a narrow measure of labor costs. Note that calendar considerations suggest a 0.1% m/m print for April AHE. This would lower the y/y to 3.1%.
(y/y percent change)
Core CPI Core PPI Import Avg Hrly Unit Oil Ex Trade Prices Earnings Labor Prices
Services Ex Food, Costs
Fuels
Dec 17 1.8 2.3 1.4 2.7 2.2 11.4
Mar 18 2.1 2.9 1.8 2.8 2.0 27.1
Jun 2.3 2.7 1.8 2.9 1.4 50.2
Sep 2.2 3.1 1.0 3.0 1.1 41.0
Dec 2.2 2.8 0.6 3.3 1.0 -14.4
Jan 19 2.2 2.5 -0.1 3.2 -19.3
Feb 2.1 2.3 -0.3 3.4 -11.7
Mar 2.0 2.0 -0.7 3.2 na -7.3
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