The Chicago PMI continues to signal economic recovery for the region, although some business have become worried about rising energy costs
The cost of living in the U.S. increased at a slower pace in March. Reuters

Consumer prices in the U.S. were flat in April amid signs that a spike in gasoline costs was ebbing, according to government statistics released Tuesday, supporting the Federal Reserve's view that the jump in fuel costs is only temporary.

The report, from the Labor Department, showed that the overall consumer price index, or CPI, remained unchanged in April after advancing 0.3 percent in March, matching economists' estimate.

Energy prices, which had risen in each of the three previous months, declined in April and offset increases in other major categories such as shelter, used cars and trucks, medical care and apparel.

Gasoline fell 2.6 percent in April and accounted for most of the decline in energy, though prices for natural gas and fuel oil decreased as well. Food prices climbed 0.2 percent in April, which was the same pace as in March.

The so-called core measure, which strips out such volatile categories, increased 0.2 percent in April, matching a 0.2 percent gain in March and economists' forecast.

Friday's report backed the view that a spike in inflation is subsiding.

That should give some comfort to Fed officials who were expecting inflationary pressure from commodity prices to fade, Bank of America U.S. economist Michelle Meyer wrote in a May 10 note to clients.

With wage growth still restrained and activity expected to slow in the second half, we anticipate a gradual and modest fading of core CPI inflation over the course of this year, Meyer added.

A cooling inflation rate underscores the views of some Fed officials who have said higher fuel prices will only have a temporary effect, giving the central bank leeway to keep interest rates at rock-bottom levels.

Fed Chairman Ben Bernanke noted on April 25 that higher gas prices have pushed up inflation, but he expects it to pass through the system, and he added that inflation should moderate to about 2 percent later this year.

Overall consumer prices rose 2.3 percent compared with a year ago, down from a reading of 2.7 percent in March. That's also the lowest level since February 2011.

In the 12 months to April, core consumer prices increased 2.3 percent. This is the first time since October 2009 that the headline 12-month reading did not exceed the measure of core inflation.

The decline in gasoline prices helped push the preliminary Thomson Reuters/University of Michigan index on consumer confidence up to a four-year-high of 77.8 in May, from 76.4 in the prior month.

At the same time, consumer expectations for inflation over the coming year declined to 3.1 percent, the lowest this year, compared with 3.2 percent in the prior survey, reflecting the drop in gasoline prices.

Falling Gas Prices

Just as concerns are rising that the U.S. economy is in the midst of another sharp springtime slowdown, the recent fall in gasoline prices offers some comfort.

After rising from $3.30 a gallon at the start of the year to $4.00 in early April, gasoline prices have fallen back in the last four weeks and are currently about $3.75. Meanwhile, the latest fall in the oil price to just above $110 per barrel suggests that it might not be too long before gasoline prices drop back to $3.50.

Even if gasoline prices don't fall further and instead remain at current levels of $3.75 a gallon for the rest of the month, after seasonal adjustment prices would still fall by almost 7 percent month-over-month in May, Paul Dales, senior U.S. economist at Capital Economics, wrote in a note Monday.

According to Dales, that would be enough to generate a 0.4 percent month-over-month decline in overall consumer prices. And if other factors remain the same, it would also drag the annual rate of CPI inflation below the Fed's 2.0 percent target rate.

Such a fall in gasoline prices clearly won't take the U.S. economic recovery to new heights. But coming at a time when economic growth has softened, it will provide a welcome boost to both household and business spending, Dales said.

If households were to fill their cars with just as much gasoline as in recent months, the lower price represents a saving of $30 billion a year, according to Dales.

Stock futures rose, signaling the market may bounce back from a three-month low. The S&P 500 futures rose 0.64 percent to 1,342.7. The Dow Jones Industrial Average rose 0.51 percent to 12,720.