Inflation fell slightly in April, providing at least some relief to consumers, but is still above levels that suggest a rate cut is imminent.
The consumer price index, a general measure of how much goods and services cost at the checkout, has risen 0.3% since March, the Labor Department’s Bureau of Labor Statistics reported Wednesday. That was slightly below the Dow Jones estimate of 0.4%.
However, on a 12-month basis, the consumer price index increased by 3.4%, as expected.
Excluding food and energy, core inflation was as forecast at 0.3% monthly and 3.6% annualized. The 12-month core inflation reading was the lowest since April 2021, while the monthly increase was the smallest since December.
Markets reacted positively following the release of the Consumer Price Index, with futures tied to major stock indexes rallying and Treasury yields falling. Futures traders increased the implied probability that the Federal Reserve would begin cutting interest rates in September.
“This is the first print in a month that wasn’t hotter than expected, so there is a recovery rally,” said Dan North, senior economist at Allianz Trade North America. “The excitement is a bit exaggerated. That’s not Caitlin Clark. She’s exciting, that’s not exciting.”
In other economic news on Wednesday, retail sales were flat month-over-month, compared with estimates of a 0.4% increase. This figure is seasonally adjusted but not adjusted for inflation, suggesting that consumers have not kept up with the pace of price increases.
Turning to the inflation report, price increases this month were largely due to increases in both housing and energy.
Housing costs, which have been a particular concern for Federal Reserve officials who expect inflation to fall this year, rose 0.4% this month, 5.5% higher than a year ago Year. Both figures are uncomfortably high for a Fed trying to get headline inflation back to 2%.
The energy index rose 1.1% for the month and rose 2.6% on an annual basis. Food prices stagnated or rose by 2.2%. Used and new car prices, which contributed to the early rise in inflation during the worst part of the Covid pandemic, declined, falling 1.4% and 0.4% respectively.
Areas that posted notable gains over the month included apparel (1.2%), transportation services (0.9%) and medical care services (0.4%). Annual growth in transport services was 11.2%. Non-energy services, a key point for policymakers, rose 0.4% month over month and 5.3% year over year.
The rise in inflation was bad news for workers, who saw their wages fall 0.2% month-on-month when adjusted for inflation. On a 12-month basis, real wages rose by just 0.5%.
For accommodation, both primary residence rent and primary owner rent, which is what homeowners believe they are getting for renting their properties, increased by 0.4% month-over-month. They rose 5.4% and 5.8%, respectively, on a 12-month basis.
Retail sales disappoint
Apparently consumers were still feeling the pressure of higher monthly prices.
The advance estimate for April retail sales showed no change from the previous month, after being revised down 0.6% in March. However, sales increased by 3% compared to the previous year. Excluding cars, sales rose 0.2%, in line with the Dow Jones estimate.
A 1.2% decline in online revenue weighed on sales figures, as did a 0.9% decline at sporting goods and related stores, while motor vehicle and parts retailers posted a 0.8% decline.
Gas stations saw a 3.1% increase, boosted by rising prices at the pump, while electronics and appliances saw a 1.5% increase.
Dilemma for the Fed
Reports have been suspended by the Fed 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 on a sustainable path back to its 2 percent target before agreeing to lower interest rates.
The Fed’s key federal funds rate is expected to be in a range between 5.25% and 5.5%, the highest level in 23 years.
In remarks on Tuesday, Fed Chairman Jerome Powell acknowledged higher-than-expected levels at the start of 2024 and said it was likely the central bank would have to keep monetary policy at the current rate for “longer than expected.” .
For financial markets, this means that the Fed will probably wait until the summer for better inflation data and make its first interest rate cut in September. That would be the first reduction since the beginning of the Covid pandemic in 2020.
“We don’t expect cuts to come until September at the earliest,” said North, the Allianz economist. “Their view seems to be, ‘We’re in no hurry to cut rates. Inflation is nowhere near 2%, the economy is fine, we’re not going to do anything for the next few months.’”
Fed officials raised the federal funds rate 11 times from March 2022 to July 2023, hoping it would help curb demand that was driving inflation to its highest level in more than 40 years. Policymakers had expected inflation to ease once supply chain problems caused by the pandemic eased, but strong demand boosted by fiscal and monetary stimulus kept price pressures high.
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2024-05-15 14:07:52
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