U.S. core CPI is running at 2.3% on an annual basis. Modest inflation is broad-based – core goods, core services (excluding shelter), and the shelter component are all in the 2% range. Notable sectors where inflation is rising faster than the overall rate are restaurants (3.1% yoy) and apparel (4.7% yoy). The latter is likely to roll over later in the year now that the spike in cotton prices has subsided. The shelter component remains problematic because it is heavily weighted in the index and currently reflects an imbalance between the demand and the supply for rental units versus units for sale, rather than a reflection of broad inflationary pressures.
Nonetheless, the Fed has been very clear about the path for monetary policy, and we do not expect that inflation will rise outside of the Fed’s comfort zone in 2012.