Inflation eased slightly in April, giving consumers at least some reassurance, but it remains above levels that suggest a rate cut is imminent.
The Consumer Price Index, a broad measure of the prices of goods and services at the register, rose 0.3% from March, the Labor Department’s Bureau of Labor Statistics said Wednesday. This was slightly below the Dow Jones forecast of 0.4%.
However, on a 12-month basis, CPI rose 3.4%, in line with expectations.
Core inflation, which excludes food and energy, came in at 0.3% for the month and 3.6% for the year, both in line with expectations. The core 12-month inflation rate was the lowest since April 2021, with the smallest monthly increase since December.
After the CPI release, the market reacted positively, with futures prices tracking major stock indexes rising and US Treasury yields falling. Futures traders have increased the implicit probability that the US Federal Reserve will start cutting interest rates in September.
“This is the first time in a month that it hasn’t been as hot as expected, so there’s a sense of relief,” said Dan North, senior economist at Allianz Trade North America. “She’s a little too excited. This isn’t Caitlin Clark. She’s exciting, but this isn’t exciting.”
In other economic news Wednesday, the Commerce Department said retail sales were flat month-over-month, compared to an expected 0.4% increase. This figure is adjusted for seasonality, not inflation, and suggests consumers are not keeping up with the pace of price increases.
In the inflation report, price increases for the month were largely driven by increases in both housing and energy prices.
Shelter costs, a particular concern for Federal Reserve officials who expect inflation to decline this year, rose 0.4% in the month and 5.5% from a year earlier. Both are uncomfortably high levels for the Fed, which is trying to get overall inflation back to 2%.
The energy index rose 1.1% for the month and 2.6% for the year. Food prices were flat and rose 2.2%, respectively. Prices of used and new cars, which contributed to an early rise in inflation during the worst of the coronavirus pandemic, both fell, falling by 1.4% and 0.4%, respectively.
Sectors that showed notable increases over the month included apparel (1.2%), transportation services (0.9%), and medical services (0.4%). For transport services, the annual growth rate was up to 11.2%. Services excluding energy, a key point for policymakers, increased by 0.4% month-on-month and by 5.3% for the year.
Rising inflation is bad news for workers, with inflation-adjusted monthly incomes falling by 0.2% from the same month. On a 12-month basis, real profit increased by only 0.5%.
In the shelter component, both principal residence rents and significant owner-equivalent rents, or the rents that homeowners think they can get for renting their properties, rose 0.4% month-over-month. On a 12-month basis, they increased by 5.4% and 5.8%, respectively.
Retail sales are disappointing
It appears that consumers continued to feel the danger of price hikes this month.
Advance forecasts for April retail sales were unchanged for the month after a downwardly revised 0.6% increase in March. However, sales increased 3% year over year. Excluding auto sales, sales rose 0.2%, in line with Dow Jones forecasts.
Sales were depressed by a 1.2% decline in online receipts, while sales at sporting goods and related stores were down 0.9%, and auto and parts stores were down 0.8%.
Gas stations reported a 3.1% increase, driven by higher gas station prices, while electronics and appliances recorded a 1.5% increase.
The so-called control group, which excludes many items and is included in the Commerce Department’s gross domestic product (GDP) calculations, fell by 0.3%.
“It’s important to note that retail sales were lower than expected,” said Seema Shah, chief global strategist at Principal Asset. “If that happens, it could portend some economic problems that markets won’t welcome.” management.
The Fed’s Dilemma
The report comes as the Fed has put policy on hold starting July 2023 as inflation has proven more resilient than expected. Policymakers have said in recent weeks that they need more evidence that inflation is on track to return to a sustainable 2% target before agreeing to cut rates.
The Fed’s target range for the overnight lending rate is 5.25% to 5.5%, the highest level in 23 years.
Fed Chair Jerome Powell acknowledged in remarks Tuesday that the early 2024 numbers were higher than expected, and the central bank may need to keep monetary policy at current interest rates “for longer than thought.” He said it was highly sexual.
For financial markets, this means the Fed will likely wait until the summer for improved inflation data before making its first rate cut in September. This is the first decline since the early days of the coronavirus pandemic in 2020.
“We think we won’t see a rate cut until September at the earliest,” said Allianz economist North. “Their thinking seems to be, ‘We’re in no hurry to cut rates. Inflation isn’t close to 2%, the economy is fine, and we’ll do nothing for a few months.’
Fed officials raised the key overnight interest rate 11 times from March 2022 to July 2023 in hopes of quelling demand that has pushed inflation to its highest level in more than 40 years. Policymakers believed inflation would end once supply chain issues brought on by the pandemic eased, but strong demand supported by fiscal and monetary stimulus meant price pressures remained elevated. It has become.
