- Core inflation was quite strong, as rising tobacco taxes pushed the core rate up 0.3% M/M.

- U.S. headline inflation was flat on the month, with headline inflation falling by 0.7% Y/Y.

- Overall, we maintain our bias for lower consumer price inflation as growing economic slack tempers inflation pressures.

U.S. consumer price inflation was flat on the month in April, following the 0.1% M/M drop the month before. On an annual basis, headline inflation declined by 0.7% Y/Y which comes on the heels on the 0.4% Y/Y drop the month before. Core consumer prices, however, were stronger than expected as rising tobacco taxes for a second straight month artificially pushed core prices up 0.3% M/M (up 0.253% M/M at 3 decimal places). This was stronger than the market consensus for a more modest 0.1% M/M gain, and brought the annual pace of core consumer prices to 1.9% Y/Y, from the 1.8% Y/Y gain in March. Without the influence of the tax hike, core inflation would have risen by a more modest 0.18% M/M.

As a result of the spike in April, the 3-month annualised trend in core inflation rose to 2.5% from 2.2% the month before, while the 6-month trend rose to 1.7% from 1.2%.

Outside of the 9.3% M/M gain in tobacco prices, which was mostly due to higher tobacco taxes, and the 0.4% M/M gain in vehicle prices and medical care, the report provided further confirmation of broadly-based consumer price deflation. There were big drops in the price for gasoline (down 2.8% M/M), computing costs (down 0.6% M/M), recreation costs (down 0.4% M/M), and food costs (down 0.2% M/M). Housing costs were also lower, falling by 0.1% M/M, though owners equivalent rent rose 0.1% M/M).

On the whole, despite the second monthly surprising rise in core consumer prices due to tobacco taxes, the outlook for U.S. consumer prices remains intact. Indeed, with the economy continuing to weaken and deteriorating labour market conditions expected to keep a lid on wage pressure, the downward trajectory on headline consumer price inflation should continue, and we do not expect the recent upward trend in core consumer inflation to persist. As such, our bias continues to be one for weaker consumer price inflation in the coming months as the growing economic slack dampens the once raging inflationary flames.