By Lucia Mutikani
WASHINGTON, May 12 (Reuters) - U.S. consumer prices likely rose at a solid pace for a second straight month in April, which would result in the largest annual increase in inflation in more than 2-1/2 years and further bolster expectations the Federal Reserve would keep interest rates unchanged for a while.
The Consumer Price Index report from the Labor Department on Tuesday is also expected to show an acceleration in the monthly underlying inflation rate, though that would be because
of a one-time adjustment to rent measures after last year's shutdown of the federal government prevented data collection.
It would follow on the heels of news last week of a bigger-than-anticipated increase in nonfarm payrolls in April. The U.S.-Israeli war with Iran has driven oil prices higher, immediately reflected in higher costs for gasoline, diesel and jet fuel. Economists believe the second-round effects would be felt in the months ahead. Financial markets expect the U.S. central bank to keep rates unchanged into 2027.
Back-to-back strong inflation readings would escalate political risk for President Donald Trump and his Republican party ahead of November's midterm elections. Trump won re-election in 2024 in large part because of his promise to reduce inflation, but Americans have soured on his handling of the economy and many blame him for the pain at the pump.
"People are now realizing that the pitch they got about lowering the cost of goods and services is a fairy tale," said Brian Bethune, an economics professor at Boston College. "They were basically treading water with their nose just above the surface, now they are being pulled down below the surface. There is no air to breathe."
The CPI likely increased 0.6% last month after jumping 0.9% in March, a Reuters survey of economists predicted. Estimates ranged from a 0.4% gain to a 0.9% rise.
The moderation after posting the largest increase since June 2022 was mostly mechanical, economists said. Oil prices shot above $100 a barrel in March following strikes against Iran, before pulling back to still-high levels after a ceasefire in early April.
Gasoline prices likely accounted for most of the increase in the CPI last month after a record surge in March.
Food prices were also expected to have accelerated after an unusual flat reading in March. Economists expected food prices to rise in the coming months, partly reflecting higher energy prices and fertilizer shortages amid shipping disruptions in the Strait of Hormuz.
ONE-TIME BOOST FROM RENTS
In the 12 months through April, the CPI is projected to have advanced 3.7%. That would be the biggest year-on-year increase since September 2023 and follow a 3.3% rise in March.
The Fed, which tracks the Personal Consumption Expenditures price indexes for its 2% inflation target, last month left its benchmark overnight interest rate in the 3.50%-3.75% range.
Excluding food and energy, the CPI is forecast to have risen 0.3% last month, with a greater chance of rounding up to 0.4%. The so-called core CPI gained 0.2% in March. The Bureau of Labor Statistics, which compiles the CPI report, is expected to make a one-time adjustment to rents and owners equivalent of rent.
The BLS splits its rent survey into six panels. Each panel is sampled every six months on a rotating basis. But because of last year's 43-day government shutdown, no data was collected in October. The BLS used a method called carry-forward imputation for rent and OER to account for the missing data, which artificially lowered the indexes.
"The April report will include hard data for that part of the shelter panel, which should lead to a significant catch-up effect," said Lou Crandall, chief economist at Wrightson ICAP. "We expect that special factor to add roughly a tenth of a percent to the increase in the core this month."
Underlying inflation was also expected to get a lift from healthcare costs after a surprise decline in March. Core goods prices are expected to have been muted, with most economists saying the pass-through from tariffs was probably over. The U.S. Supreme Court struck down Trump's sweeping tariffs in February.
"It's unlikely that retailers will pass on savings they are now seeing following the decline in the effective tariff rate in February, after the Supreme Court's ruling, but the pressure to raise prices further has eased," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
Core CPI inflation is expected to have increased 2.7% year-on-year in April after rising 2.6% in March. Some economists were dismissive of core CPI inflation.
"The problem is that the average person, the working people, they don't live in core CPI," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University. "They live in higher gasoline prices, they live in higher grocery prices, and they are getting hurt."
(Reporting by Lucia Mutikani; Editing by Andrea Ricci )
