There was no mention of “inflation” or “consumer prices” in Fed Chairman Ben Bernanke’s speech this morning. Of course, his prepared remarks were focused elsewhere: regulation and financial innovation, to be precise. No matter, as inflation was probably on the chairman’s mind just the same, especially after 8:30 this morning, Washington time, when the April update on consumer prices was released.
For a refreshing bit of change, the latest numbers offer reason for cautious optimism, along with some fresh hope for optimism on the future course of Bernanke’s authority on matters of price trends. The core CPI through April rose by 2.4% on a 12-month basis, down from 2.5% previously. In fact, April’s 2.4% annual pace is the lowest annual rate in nearly a year, as our chart below shows.

But if inflation is moderating, as Bernanke has been predicting, what will we worry about now? Slowing growth, of course. In fact, some argue that inflation’s downshift is a byproduct of the economy’s slowdown. “It is now becoming more apparent that core inflation has peaked and is moving lower in response to anemic economic activity,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, told Bloomberg News before the CPI report’s release.
At the very least, the recent fall in core CPI gives the Fed some breathing room for considering the potential for lowering interest rates if the economy needs a jolt of liquidity to offset any further slowdown. For the moment, though, traders aren’t rushing to that conclusion. Fed funds futures didn’t move much after the CPI report. The November contract, for instance, is still priced in anticipation for 5.25% Fed funds.
Does that mean the market remains skeptical about moderating inflation? Or, perhaps the crowd thinks the economy’s not about to fade, despite some predictions to the contrary?
Of course, one could make the case that inflation’s still a problem by way of the headline number. If you add energy and food back into the equation, CPI advanced by 0.4% in April, mirroring the pace in March. David Resler, chief economist at Nomura Securities in New York, labels headline inflation’s pace “uncomfortably large,” in a note to clients this morning.
The jury’s never really out when it comes to inflation. But for the moment, at least, Bernanke and company have a reprieve, assuming you’re looking at the world through core-filtered glasses.