Falling gas prices lead inflation lower for second month

Gasoline prices fell in April, leading overall inflation lower for the second month in a row, according to the Consumer Price Index.

You paid less for gasoline in April, and that led overall inflation lower for the second month in a row.

The Consumer Price Index, a key measure of inflation, fell 0.4% in April, according to the Labor Department. Compared to a year earlier, prices are up only 1.1%, a level of inflation that's considered rather low.

Falling gas prices were the main driver for the broader decline for the second month in a row, the Labor Department noted.

The average price for a gallon of unleaded gas fell by about 13 cents in April, ending the month at $3.51, according to AAA.

On one hand, lower prices at the pump can act "like a tax cut for consumers, offsetting some of the payroll tax hike," said Jim O'Sullivan, chief economist of High Frequency Economics. Consequently, tame inflation can boost consumer spending.

That said, low inflation can also be a sign of weak economic growth.

Gasoline makes up a large part of the CPI, but economists often like to strip out both energy and food to get a better read on the underlying economy.

That measure, called core CPI, rose 0.1% in April and showed prices were up 1.7% over a year ago, the lowest level since June 2011.

Airfares declined 0.7%, hospital services dropped 0.7% and clothing prices fell 0.3% in April.

Low inflation has already sparked some concerns among Federal Reserve officials, like St. Louis Federal Reserve President James Bullard, for example. Over the long-run, the Fed aims to keep inflation around 2% a year, and a level below that gives the central bank more leeway to continue its controversial stimulus policy, buying $85 billion a month in Treasuries and mortgage-backed securities.

"With inflation dropping to a two-and-a-half year low and labor markets still soft, the Fed is well-positioned to keep the monetary spigots open in support of the economy," said Jim Baird, partner and chief investment officer for Plante Moran Financial Advisors, in a note.

An alternate measure of inflation, often preferred by the Federal Reserve, shows core inflation was only 1.1% year-over-year in March. The last time initial readings showed core inflation was that low was in the summer of 2010, just before the Fed launched QE2.

Posted in: cpi, gas prices, inflation

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