Consumer prices (March 2007)

• The lower-then-expected increase in core prices (0.1%, 0.06 to two decimals) lowered the 12-month core inflation rate to 2.5% from 2.7%
• Core prices were restrained by a 2.3% decrease in lodging away from home prices, a 1.0% decline in apparel prices and moderation in medical care prices
• Overall CPI prices rose 0.6% pushed up by a 5.9% increase in energy prices

Core inflation rate begins to ease

Core prices were lower than expected, rising 0.06% in March, which lowered the 12-month core inflation rate to 2.5% from 2.7%. Over the last three months core prices rose at a 0.19% average (2.3% saar), similar to the average advances of 0.17% during the three preceding months, and well below the 0.26% average increases in Q106. Shelter prices slowed, increasing 0.1%, but were restrained by a 2.3% decline in lodging away from home prices. After ten consecutive increases of 0.4% in rent of primary residence prices, they rose 0.3% in March, suggesting that rents may be starting to decelerate. Owners??™ equivalent rent (OER) rose 0.27% in March, 3.0% over the last three months, a slowing from the 4.0% pace of the previous 3 months. After strong increases in the first two months of 2007, medical care prices eased in March, rising 0.1%. The 12-month inflation rate of 4.0% is 0.1pp below the pace from a year ago, suggesting that pressures at the beginning of the year were a response from the slowing in 2006. Core PCE inflation rate likely eased to 2.2% in March from 2.4%.

Overall CPI prices rose 0.6%, the 12-month inflation rate picked up to 2.8% from 2.4%. A 5.9% increase in energy prices, led by a 10.6% rise in gasoline prices, boosted headline inflation. Over the last three months, headline inflation has risen at a 4.7% annualized rate. Continued increases in gasoline prices during April will translate into a 0.5% headline inflation reading in April, nonetheless, the 12??™month change will likely ease to 2.6%. Thereafter, as energy prices stabilize, headline CPI will slow significantly during Q2-Q307.

The 12-month core inflation rate is beginning to slow gradually. The main source from pressures ??“the rental components??“ seems to be moderating and will likely tend to ease as improved housing affordability gradually translates into a shift back from renting to buying. Pressures will tend to ease somewhat as economic activity moderates and generates some slack in the labor market. We continue to expect core inflation to decrease somewhat ??“we maintain our base scenario for 2007: average of 2.3%--; yet, the risks continue biased to the upside.