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Mixed CPI readings send dollar, yields lower

April consumer price inflation data gave mixed signals, with monthly measures of both core and headline measures coming in lower than expected, but some analysts saying there were signs prices increases would soon move closer to the Federal Reserve's 2% target.

Core CPI, which excludes often volatile food and energy costs, was up 0.1% in April, after it rose 0.2% in March, the U.S. Labor Department said May 10. Headline CPI, which includes all consumer products, increased 0.2% in April after it fell 0.1% the month before.

Both core and headline CPI came in under consensus expectations by a tenth of a percent, James Knightley, chief international economist at Dutch Bank ING wrote in a research note, in which he said softer inflation was "just a blip."

Yields on the benchmark 10-year Treasury fell 2 basis points to 2.972% by 11:10 a.m. ET, while the dollar declined.

However, the annual inflation rate for all consumer items was 2.5%, while core inflation was at 2.1%, lending more support to market expectations that the Fed will continue to raise rates at least three times this year.

"We see further upward price pressures developing and predict CPI approaching 3% year over year and core CPI rising to 2.5% by summer as energy prices, unwinding of mobile cell phone data plan charge effects and rising import prices feed through," Knightley wrote, adding that "in an environment of robust economic activity fueled by tax cuts and a tight jobs market there is the risk of a market re-appraisal."

The Fed's preferred rate of inflation, annualized core personal consumption expenditures, is still slightly below 2%, at 1.9%. But Knightley said he expected it to break above the target rate soon.

Unemployment claims for the week ending May 5 held at 211,000, the Labor Department said May 10 in a separate release. The four-week moving average was 216,000, the lowest it had been since Dec. 20, 1969, the agency said.

Still, workers' real average earnings were flat in April, with a rise in earnings of 0.1% offset by the 0.2% increase in CPI.

The Fed already raised rates once in March most economists expect the next hike in June.

"While we do expect modestly stronger underlying inflation than last year, the latest report does not suggest any reason for the Fed to move toward a faster pace of rate hikes than the three for 2018 in the March dot plot," TD Securities economists said in a research note, adding that markets remained "well priced for a June rate hike."