The betting still seems to be that the Fed will raise rates in June, but it doesn't seem like the inflation data could be the reason. The numbers were again quite tame in April, with the overall CPI increasing by 0.2 percent in the month and the core by 0.1 percent. The year over year increase in the overall CPI is 2.2 percent, and 1.9 percent in the core. This puts inflation well below the 2.0 percent average rate (for the PCE deflator) being targeted by the Fed.

However, the weakness of inflation is even more striking if we look at a core CPI that excludes shelter. There is a logic to this, since shelter does not follow the same dynamic as other components in the CPI. Furthermore, the Fed is not going to reduce shelter costs by raising interest rates. In fact, by slowing construction and thereby reducing supply, it could well be raising shelter costs.

Here's the picture.

Core CPI Inflation, Excluding Shelter Costs
core inf no shelter
Source: Bureau of Labor Statistics.

The rate of inflation in this non-shelter core is 0.8 percent over the last year. Perhaps even more importantly, it is falling, not rising. This means that the extremely weak evidence of any acceleration in core inflation was completely due to rising rents. If we pull out housing, the rate of inflation in everything else is declining. 

So why does the Fed feel it has to raise rates?