Inflation cool at the core

CPI excluding food and energy prices unchanged in April; overall index gain less than March.

May 18, 2005: 9:18 AM EDT

NEW YORK (CNN/Money) - Consumer prices excluding food and energy did not rise in April, the government reported Wednesday, a reading that dampened recent inflation fears.

The Labor Department said its Consumer Price Index, the government's main inflation gauge, rose 0.5 percent in April, compared with a 0.6 percent rise in March. Economists surveyed by Briefing.com had forecast a 0.4 percent rise.

But the so called "core CPI," which excludes often-volatile food and energy prices, was unchanged, compared with a 0.4 increase the previous month. Economists had forecast that closely watched inflation reading would be up 0.2 percent.

"This is very good news," said Anthony Chan, senior economist with J.P. Morgan Asset Management. "Workers may end up getting the purchasing power they've been lacking so far. While overall prices are still rising, we have good reason to believe energy prices will be going down."

Investors also welcomed the report, driving stock futures higher in before-hours trading, pointing to a higher start for stocks. Treasury bond prices also rose, driving yields lower, as investors bet the mild reading would put less upward pressure on interest rates.

Overall, the CPI is up 3.5 percent over the last 12 months, more than the rise in hourly or weekly wages, meaning that the average employee has been losing ground to inflation.

In its report, the department said energy prices jumped 4.5 percent in the month, while food prices were up 0.7 percent, both showing faster price gains than in March. But many other price categories, including housing, apparel and medical costs showed inflation pressures slowing. Apparel prices actually fell 0.6 percent in the month.

But while retail energy prices saw a spike in April, crude oil futures are down significantly from record highs hit in March.

Chan said the report's lack of inflationary pressure probably won't be enough to cause the Federal Reserve to pause in its policy of raising rates by a quarter percentage point at each meeting in an effort to contain inflation. But he said it is still a good sign for those concerned about rising interest rates.

"It provides more ammunition for the doves arguing for more moderation, and takes leverage away from the hawks arguing for (a half-percentage point) hike," said Chan.