Inflation eased slightly in April, providing at least some relief to consumers while remaining above levels that suggest a rate cut is imminent.
The Consumer Price Index, a broad measure of the price of goods and services at the cash register, rose 0.3% from March, Labor Department data showed Bureau of Labor Statistics Report Wednesday. That was slightly lower than the 0.4% forecast by Dow Jones.
However, on a 12-month basis, CPI rose 3.4%, in line with expectations.
Excluding food and energy, key core inflation rates were 0.3% monthly and 3.6% annually, both in line with expectations. The 12-month core inflation data was the lowest since April 2021, and the monthly increase was the smallest since December.
After the announcement of CPI, the market reacted positively, with futures linked to major stock indexes rising and Treasury yields falling. Futures traders raised the implicit probability that the Federal Reserve will start cutting interest rates in September.
“This is the first time in a month that the data haven’t beaten expectations, so there’s been a relief rally,” said Dan North, senior economist at Allianz Trading North America. “The excitement is a little overdone. That’s not Caitlin Clark. She’s It’s exciting, it’s not exciting.”
In other economic news on Wednesday, retail sales were unchanged from the month, compared with expectations for a 0.4% gain. The figure is adjusted for seasonality rather than inflation, suggesting consumers are not keeping pace with rising prices.
In terms of inflation reports, price increases this month were largely driven by increases in housing and energy.
Housing costs increased 0.4% this month and were up 5.5% from a year earlier, posing a particularly troubling issue for Fed officials who expect inflation to fall this year. Both levels are troubling for the Fed as it tries to push headline inflation back to 2%.
The energy index rose 1.1% in the month and 2.6% in the year. Food prices were flat, rising 2.2%. Prices for used cars and new cars, which contributed to early inflation during the worst period of the coronavirus pandemic, both fell, down 1.4% and 0.4% respectively.
Sectors with significant gains this month included apparel (1.2%), transportation services (0.9%) and health care services (0.4%). For transportation services, the annual growth rate reaches 11.2. The services sector, which excludes energy and is the focus of policymakers, grew 0.4% this month and 5.3% annually.
Rising inflation was bad news for workers, whose monthly earnings fell 0.2% when adjusted for inflation. On a 12-month basis, actual earnings grew by just 0.5%.
In the housing component, principal residence rents and significant owner equivalent rents (or the rents at which homeowners believe they can rent out their properties) both increased 0.4% for the month. Growth in the 12 months was 5.4% and 5.8% respectively.
Retail sales disappoint
Consumers are clearly still feeling the pinch from higher prices this month.
this Pre-estimated retail sales There was no month-on-month change in April, following a 0.6% decrease in March. However, sales were up 3% from a year ago. Excluding autos, sales rose 0.2%, in line with Dow Jones forecasts.
Online revenue fell 1.2%, leading to lower sales figures, with sporting goods and related stores down 0.9% and auto and parts dealers down 0.8%.
Prices at gas stations rose 3.1%, driven by higher prices at the pump, while prices for electronics and appliances rose 1.5%.
The Fed’s Dilemma
The report comes as the Fed has been on hold since July 2023 as inflation has proven more resilient than expected. Policymakers have said in recent weeks that they need more evidence that inflation is returning to their 2% target sustainably before agreeing to lower interest rates.
The Federal Reserve’s benchmark overnight lending rate target range is 5.25%-5.5%, the highest level in 23 years.
In a speech on Tuesday, Federal Reserve Chairman Jerome Powell acknowledged that data for early 2024 were higher than expected and said the central bank may need to “keep current rates on hold longer than expected.”
For financial markets, this means the Fed may wait for the end of the summer for better inflation data and cut interest rates for the first time in September. This would be the first decrease since the early days of the COVID-19 pandemic in 2020.
“We think they will cut rates as early as September,” said Allianz economist North. “Their thinking seems to be, ‘We are in no rush to cut rates. Inflation is not close to 2%, the economy is in good shape, and we have a few No action will be taken within the month.'”
Fed officials raised the key overnight funds rate 11 times from March 2022 to July 2023, hoping it would help curb demand that has driven inflation to its highest level in more than 40 years. Policymakers originally believed that inflation would pass once supply chain problems caused by the epidemic eased, but strong demand driven by fiscal and monetary policy stimulus has caused price pressures to continue to rise.
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