The annual inflation rate fell slightly in April, according to the Bureau of Labor Statistics. Despite persistent price pressures from housing and gasoline in the April inflation data, investors see a ray of hope for potential interest rate cuts by the Federal Reserve in the near future.
Last month, the consumer price index slowed to 3.4 percent, down from 3.5 percent in March. This was in line with market estimates. The CPI rose 0.3 percent monthly, down from 0.4 percent in the previous month and below the consensus forecast of 0.4 percent.
Core inflation, which strips the volatile energy and food components, also eased to 3.6 percent, down from 3.8 percent, matching economists’ expectations. On a month-over-month basis, the core CPI jumped 0.3 percent, down from 0.4 percent and matching market projections.
U.S. government data showed that energy and shelter costs were the primary contributors to the monthly inflation increase.
The energy index advanced 1.1 percent, with gasoline climbing 2.8 percent and fuel oil swelling 0.9 percent.
Despite crude futures easing in recent weeks, oil prices continue to be elevated. U.S. crude is up more than 10 percent year-to-date to nearly $79 a barrel. Brent, the international benchmark for oil prices, has climbed close to 8 percent so far this year, hovering around $83 per barrel.
Gasoline prices are also higher than they were a year ago. According to the American Automobile Association (AAA), the national average for a gallon of gasoline is $3.61, up 18 percent year-to-date.
Shelter rose 0.4 percent from March to April and is up 5.5 percent compared to the same time a year ago.
Shelter costs, which contribute about one-third to the CPI, have defied expectations. For more than a year, a range of economists and monetary policymakers have forecasted lower prices.
Federal Reserve Chair Jerome Powell told reporters at a press conference earlier this month that the CPI data are taking time to reflect a cooling rental market. He noted that he is confident shelter costs will decline, but Mr. Powell conceded that he is “not so confident in the timing of it.”
“Those market rents take years, actually, to get all the way into rents for tenants who are rolling over their leases,” he said. “It’s complicated, but the story is it just takes some time for that to get in.”
A new report by Zillow showed that U.S. rents ticked up 0.6 percent in April, with the typical cost for a rental unit just shy of $2,000. They are also up 3.6 percent from last year.
The food index was unchanged as food prices tumbled 0.2 percent, and the food away from home category rose 0.3 percent.
New vehicles dropped 0.4 percent, while used cars and trucks declined 1.4 percent. Apparel surged 1.2 percent. Medical care commodities picked up 0.4 percent.
Services inflation was flat at 5.3 percent. Transportation services rocketed 0.9 percent and are up more than 11 percent in the 12 months ending in April. Medical care services inched 0.4 percent higher.
The 3-month annualized headline CPI was unchanged at 4.6 percent, up from as low as 1.9 percent in December. The 6-month annualized CPI rose to an eight-month high of 3.7 percent.
Supercore CPI, which also excludes housing, rose to 4.9 percent year-over-year, up from 4.8 percent.
The 3-month annualized core inflation rate eased from 4.5 percent in March to 4.1 percent in April. The 6-month annualized core CPI surged to 4.1 percent, the highest since July.
The latest CPI figures come as wholesale prices rocketed at a higher-than-expected pace of 0.5 percent last month, putting pressure on long-term inflation trends since the producer price index (PPI) serves as a precursor to future data.
Looking ahead to next month’s CPI report, the Cleveland Fed’s Inflation Nowcasting model anticipates a 3.5 percent reading.
Market Reaction
Financial markets were pleased by the light CPI data, with Dow Jones Industrial Average and S&P 500 rallied to record highs midweek. The tech-heavy Nasdaq Composite Index added 0.4 percent.
U.S. Treasury yields were red across the board. The benchmark 10-year yield shed 7.4 basis points to 4.371 percent. The 2-year yield slipped below 4.76 percent, while the 30-year bond fell to 4.53 percent.
The U.S. Dollar Index (DXY), a gauge of the buck against a basket of currencies, tanked to around 104.50.
Investors are hoping that the April inflation figures would offer relief for the Federal Reserve and bolster the hopes of a rate cut.
The data-dependent central bank will need to observe more easing inflation before it can pull the trigger on a rate cut, says Scott Anderson, the chief U.S. economist at BMO.
“The Fed will need to see more evidence of inflation moderation in the months ahead to give the all-clear to cut interest rates,” he said in a note.
But the CPI report does reveal “an encouraging signal that consumer inflation pressures may be moderating a bit more visibly across a broader cross-section of categories,” he added.
“If sustained, it could keep Fed rate-cut expectations for September and December alive and well. Clearly, restrictive monetary policy has more work to do, and the Fed will remain patient and watchful,” Mr. Anderson said. “However, today’s softer CPI and retail sales reports do measurably reduce the already low probability of additional rate hikes from the Fed.”
But, according to Mark Hamrick, a senior economic analyst at Bankrate, the economy will still likely endure a higher-for-longer climate.
“The status of the battle against inflation requires that interest rates remain elevated in the near-term,” said Mr. Hamrick, adding that “the lack of a nasty surprise this time around” was welcomed by Wall Street.
The Path of Interest Rates
Fed policy expectations have seesawed this month, with investors pricing in either one or two quarter-point rate cuts this year, according to the CME FedWatch Tool.
Central bank officials have indicated that rates could remain higher for longer amid renewed inflationary pressures. Once again, Mr. Powell reiterated at a banking conference in Amsterdam on May 14 that the next policy decision will not be a rate hike.
“I don’t think that it’s likely, based on the data that we have, that the next move that we make would be a rate hike,” he stated. “I think it’s more likely that we’ll be at a place where we hold the policy rate where it is.”
While the baseline outlook is keeping the benchmark federal funds rate in the range between 5.25 percent and 5.50 percent, some have said that a rate hike should be left on the table.
“I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” Fed Governor Michelle Bowman said in prepared remarks at an April 5 event. “Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2 percent over the longer run.”
The next two-day policymaking Federal Open Market Committee (FOMC) meeting will be on June 11 and 12.
From The Epoch Times