The consumer-price index rose a seasonally adjusted 0.3% in April from the prior month, driven by increasing costs for staples such as gasoline, food and shelter, the Labor Department said Thursday. It was the strongest monthly gain since last June.

April consumer prices were up 2% from a year earlier, a marked pickup from October when annual inflation slipped to a four-year low of 1%.

A slew of recent economic data illustrated a mixed economic picture. New claims for jobless benefits fell to a seven-year low last week, the Labor Department said Thursday, a pickup that followed April job growth that was among the strongest improvements since the recession ended.

But manufacturing output contracted last month, a separate Fed gauge showed Thursday. Other recent figures showed that retail sales grew very modestly, providing less pent-up demand following a winter in which overall economic output likely contracted.

Excluding volatile food and energy, prices climbed 1.8% in April from a year earlier. That was the fastest annual increase since last August, a sign that underlying price pressures may be gaining traction.

Fed officials have been debating the timing of their first increase in short-term interest rates, after they wind down later this year a bond-buying program meant to spur growth. If annual inflation nears the Fed’s 2% target, the central bank would have more leeway to raise rates.

But weakness elsewhere in the economy could restrain Fed officials who worry about slack across the economy, particularly in a labor market that has seen millions of Americans leave the labor force. Chairwoman Janet Yellen last week said the Fed would hold rates low for a “considerable time” after the bond-buying ends.

The Fed’s inflation target is based on a separate inflation gauge, the Commerce Department’s personal consumption expenditures price index, which rose 1.1% in March from a year earlier. The April figure, due later this month, will likely show an acceleration, though many economists expect it will remain below the CPI reading.

Higher inflation, even coming off a low level, could pose a headwind to consumers because wages have largely stagnated. On an inflation-adjusted basis, hourly wages fell 0.3% last month and are virtually flat from a year ago, a separate Labor Department report said Thursday.

Thursday’s consumer-prices report showed seasonally adjusted gasoline costs rose 2.3% in April, the first monthly gain since December.

Outside of volatile food and energy costs, prices rose from 0.2% last month. Shelter prices, which account for almost a third of the total index, also rose 0.2%.

Electricity costs fell 2.6% in April, the biggest one-month drop since 1986. The Labor Department said much of the decline can be attributed to “climate credits” distributed in California for the first time last month. The twice-yearly credits distribute pollution taxes on power generators to customers.

• WHAT IS THE DIFFERENCE BETWEEN HEADLINE AND CORE INFLATION?

  The best-known measure of inflation is the Consumer Price Index, produced by the Department of Labor. The measure is created by sending hundreds of Bureau of Labor Statisticsemployees out to stores, restaurants and shops across the country every single month to measure how much prices of specific items are changing. All those individual changes are added up to produce the overall metric.

  Economists focus on two main measures, the first is headline inflation, which includes everything that people buy. The second measure is core inflation, which excludes food and energy. The focus on core inflation allows critics to charge that economists don’t care about the budgets of real people.

  Actually, it’s because food and energy prices bounce around but tend to move back toward core.It may feel like food and energy prices are always rising way faster than everything else, but this isn’t true. Over the past 25 years, all prices have risen 2.7% a year. Core prices have risen 2.6% a year.

  

• WHAT’S THE DIFFERENCE BETWEEN CPI AND THE PCE PRICE INDEX?

  The Federal Reserve pays the most attention to a different inflation gauge, with a mouthful of a name: the personal consumption expenditures price index. The PCE price index is produced by the Department of Commerce. It uses different statistical techniques and makes differing assumptions about prices. For instance, the PCE includes the money employers spend on their employees’ health care. The CPI only includes the employees’ expenses. The PCE puts less weight on housing expenses.

  Fed officials favor the PCE price index, believing it to better account for what’s happening in the economy. Former Fed Chairman Ben Bernanke addressed this in a January 2012 press conference. “You’re not going to have a situation where the CPI is 10% and the PCE is 2%,” he said. “There may be a few tenths difference, but, generally speaking, they move very closely together.”

  The indexes hang together, but unlike core and headline inflation which converge over time, the PCE price index is consistently lower than the CPI. Over the past 25 years, PCE inflation has been about 0.5 percentage point lower per year.

  

• DID WE JUST HIT THE FEDERAL RESERVE’S INFLATION TARGET?

  No. Firstly, the Fed’s target is for 2% inflation on the personal consumption expenditures price index, and that measure has only climbed 1.2% in the year through March (April’s figure is not available yet). Secondly, the Fed’s target is for inflation in the longer-run. That means the central bank is inclined to look through brief periods of too high or too low inflation and focus on their forecasts in coming years. If PCE inflation hits 2% but the Fed expects it to soon decline again, they would be unlikely to react.

• HOW CAN INFLATION BE LOW WHEN EVERYTHING IS SO EXPENSIVE?

  Economists focus on the change in prices from year to year. That doesn’t mean prices are low. On the contrary, the CPI shows that prices are the highest they’ve ever been.  The 2% change in inflation is the increase from exactly a year ago. Over time, that adds up. Prices have more than doubled since 1983, and even since the recession’s official end in June 2009, prices have risen by 10%. So if it feels like prices have risen more than 2%, they sure have. Just not within the past 12 months.

   

• HAS THE GOVERNMENT CHANGED THE INFLATION STATISTICS OVER THE YEARS SO THAT THEY’RE LOWER?

  Yes, it has. But this is not a massive conspiracy to hide runaway inflation. Changes to the CPI over the years, to adjust the statistical methods, have lowered the index by about 0.3 percentage point. So if the old methodology were still in place, the Department of Labor might be reporting inflation of about 2.3% instead of 2% right now.

(Source: Wall Street Journal)