By Harini Chakrapani
The Labor Department’s monthly report on consumer price index (CPI), a measure of what Americans pay for everything from meat to medicines will be released Thursday, April 14 at 8.30 a.m. Economists will keep their eyes peeled, because the CPI is an indicator of inflation. According to Barclay’s forecast, the CPI is expected to gain 0.2 percent in March, indicating a stronger economy and foreshadowing an increase in interest rates.
Here are the 5 key highlights to watch out for in the report.
- Say goodbye to low gas prices:
Price at the pump is climbing. According to AAA’s fuel gauge report, the national average cost for a gallon is $2.057 compared to last month’s $1.917. The 14-cent increase might seem small, but it’s helping steady the economy.
For months, the CPI has been weighed down by the falling energy index. Last month, the CPI fell to 0.2 percent, while the gasoline prices plummeted by 13 percent, the lowest since February 2015.
Although, low prices can make drivers happy they are a drag on the economy. The huge losses have already caused oil rigs to shut down and employees to lose jobs.
“The biggest surprise in this month’s report is that gas prices will be a major driver of overall CPI,” said Senior Economist Oren Klachkin at Oxford Economics.
Source: Bureau of Labor Statistics
- We are inflating, but we won’t burst
The core CPI that excludes the volatile energy and food indexes is expected to remain strong at 0.2 percent, following surges earlier this year.
January’s core CPI (0.3 percent) was the highest in four years and alleviated worries of a slowing US economy.
“Core prices were up 2.3 percent in February, the biggest yearly increase since the recession. We expect medical and rent prices to boost the core and continue the trend,” said Sophia Kearney-Lederman, economic analyst at FTN Financial.
High core prices mean Americans are paying more for rent and medical care, but inflation isn’t always bad news. Moderate inflation, indicates an increase in spending, production and consumption of goods and services, is needed to boost the economy and enable the Federal Reserve to achieve its target 2 percent inflation.
Economists predicted an eventual moderation in core prices.
“Last month’s increase in core had people starting to wonder if inflation is getting to be a bigger issue. But the core is likely to moderate due to rental costs,” said Sophia.
- Rent costs to stabilize
Rent costs have been responsible for driving the core inflation but are expected to stabilize.
Last month, the rent index ticked up to a seasonally adjusted 0.3 percent. Economists believed it to be an after effect of the improving job market, with demand growing from more employed Americans.
“We saw double digit growth in rents during the past year in San José, San Francisco, Seattle, Denver, Portland and Miami. However, we do forecast a slowdown, where rents are still going to be growing very quickly, but more in the single digits,” said Skylar Olsen, senior economist at online real-estate listing service Zillow.
Skylar attributed the slowdown to supply catching up to demand.
“There are so many new rental units. More and more landlords are having to offer concessions, and are slowing the pace of rent increases, because they are competing against more supply,” she said referring to the pick up in multi-family units including rental apartments but not condominiums that are owned by people.
- Getting well will continue to hurt
According to the Labor Department, medical care was one of the largest contributors to the rise of the core CPI last month.
Chairman and Chief Investment Officer of Hugh Johnson Advisors, Hugh Johnson predicted the medical care inflation to remain high at 0.3-0.4 percent in March.
Medical inflation has been outpacing overall inflation, growing at nearly twice the rate, over the past two decades.
The Journal of the American Medical Association (JAMA) revealed the main culprits for rising inflation in the healthcare industry through a 2013 analysis– price of drugs and medical devices, administrative costs, hospital care amongst others.
Changes to government health insurance plans and the advent of virtual care where patients are monitored remotely instead of an expensive brick and mortar hospital setting, have been cited as factors that could drive down the pressure in medical care prices.
- Interest rates to rise
The Federal Reserve’s decision to raise interest rates has kept economists on tenterhooks. But now, economists are certain a hike is likely to happen in its September meeting.
“The core CPI has been strong, the domestic scene has been strong. If we maintain the current course, the Fed will raise rates in September,” said Oren Klachkin, senior economist at Oxford Economics.
The interest rate refers to the rate at which banks can lend money to each other.
The Fed needs to raise it to achieve its target 2 percent inflation to maintain a healthy economy.
Last December, the Fed approved an interest rate hike from 0.25 to 0.5 percent following a seven-year period of near zero interest rates- devised to encourage borrowing and spending and help America recover from the financial recession of 2008.
Besides the core CPI, other economic indicators have also registered positive gains including the labor market, and the personal consumption expenditure (PCE) that also measures price changes in consumer goods and service and is the Fed’s preferred index to determine inflation.
“The Fed will want to want make sure the economy is on a strong footing before the rates are raised by another notch,” said Oren.