THE CORE OF THE FED´S INFLATION PROBLEM / THE WALL STREET JOURNAL

Heard on the Street

The Core of the Fed’s Inflation Problem

Rising oil prices and a weaker dollar should feed through to higher core inflation. But not for a while

By Justin Lahart

Updated May 22, 2015 10:34 p.m. ET
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   Relatively low gasoline prices are still holding down inflation. Above, pumping gas in Florida. Photo: WILFREDO LEE/ASSOCIATED PRESS


The dollar has slipped in recent weeks and oil prices have climbed. That doesn’t mean the Federal Reserve’s low-inflation problem has ended.

The Labor Department on Friday reported its index of consumer prices rose just 0.1% in April from March. That put it at negative 0.2% on a year-over-year basis.

With gasoline prices still well below year-ago levels, the annual decline in the overall index was entirely due to a 19.4% decline in energy prices. Core prices—which exclude food and energy costs—rose 0.3% from March for their biggest monthly gain since 2011. Core prices were up 1.8% from a year earlier, compared with the 1.6% annual gain they registered in January.              

Although excluded from core inflation, energy prices have played a role in keeping it muted by lowering manufacturing and shipping costs. The dollar’s strength has also played a part by putting downward pressure on the price of imports.

So with crude oil up nearly 30% over the past two months, and the dollar down about 6% against the trade-weighted basket of major currencies tracked by the Fed, the stage seems set for the core to keep firming.

But there can be substantial lags between movements in oil and the dollar and their effect on consumer prices. Indeed, even at the wholesale level, the effects still haven’t worked their way through the pipeline: Core raw-material prices were down 32% last month from a year earlier, the Labor Department reported last week, but prices for core finished goods were up 2%.