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Inflation closer to fed’s goal after core prices advance

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(Bloomberg) — The U.S. cost of living excluding what households pay for food and fuel climbed more than forecast in April, indicating inflation is gravitating toward the Federal Reserve’s goal.

The core consumer-price index rose 0.3 percent, the biggest gain since January 2013 and reflecting broad-based increases, a Labor Department report showed Friday. In the last three months, core inflation advanced an annualized 2.6 percent, the most since August 2011. Including food and fuel, the gauge was up a more moderate 0.1 percent as prices fell at grocery stores and gas stations.

Costs may continue to firm as fuel expenses rebound, apartment rents climb and health-care services become more expensive. Such price pressures should help Fed policy makers gain confidence in their forecast that inflation will move toward a 2 percent goal as they consider their first interest- rate rise since 2006.

“It allows the Fed to say inflation is doing better,” said Michael Hanson, senior economist at Bank of America in New York. Policy makers “seem awfully confident that labor markets are going to tighten and inflation is going to pick up.”

Fed Target

Inflation will need to keep rising in order for Fed officials to be “reasonably confident” that progress on their price stability mandate is sufficient to allow for an increase in the benchmark interest rate. The Fed’s preferred measure of price growth, the personal consumption expenditures gauge, rose 0.3 percent in the year ended March and hasn’t met the bank’s goal since April 2012.

Fed Chair Janet Yellen said Friday that she still expects to raise interest rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow.

“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate,” she said in a speech in Providence, Rhode Island.

The Fed officials will announce the start of interest-rate increases at their September meeting, according to 42 of 54 economists surveyed by Bloomberg May 8-13.

Stocks fell after Yellen’s comments and the inflation data. The Standard & Poor’s 500 Index declined 0.2 percent to 2,126.06 at the close in New York. Treasury securities remained lower, with the yield on the benchmark 10-year note climbing to 2.21 percent from 2.19 percent late on Thursday.

Survey Results

The median forecast of 84 economists surveyed by Bloomberg called for a 0.2 percent advance in the core CPI. On a year- over-year basis, prices rose 1.8 percent in April, the same as in the prior month.

Consumer prices including all categories were projected to rise 0.1 percent. The CPI declined 0.2 percent in the 12 months ended in April, the biggest year-to-year drop since October 2009. That mainly reflected the plunge in fuel costs that has recently abated.

Energy prices decreased 1.3 percent in April after rising 1.1 percent a month earlier. Food costs were little changed, reflecting declines in grocery prices and higher restaurant tabs.

Energy Outlook

“Consider April the calm before the storm for the energy category,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said in a note to clients. “Gasoline prices are on pace to post a sharp seasonally adjusted rise in May, which could drive energy prices up by 4 percent.”

Restrained food and energy costs helped prop up Americans’ spending power last month. Hourly wages adjusted for inflation increased 2.3 percent over the past 12 months on average, compared with a 2.1 percent gain in the year ended March, according to a separate report from the Labor Department issued Friday.

The advance in the core index last month was bolstered by prices for rents, used cars and trucks, and medical care, which showed the biggest increase since January 2007.

A rout in global oil markets in the second half of 2014 is leading to lower airfares. American Airlines Group Inc. is among carriers ready to issue discounted tickets if the competition demands it.

Fare Wars

“To the extent capacity comes in and results in lower prices, we’ll match those prices because we have to,” Chief Executive Officer Doug Parker said Tuesday in an interview at Bloomberg’s New York headquarters. “All we can do is run our own airline and compete against those that chose to grow and we will compete aggressively.”

The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

–With assistance from Chris Middleton in Washington.


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