Inflation eased slightly in April, providing at least a little relief to consumers while remaining steady above levels that might indicate an interest rate cut is imminent.
The Labor Department's Bureau of Labor Statistics reported Wednesday that the Consumer Price Index, a broad measure of how much goods and services cost at the cash register, rose 0.3% compared to March. This was slightly below the Dow Jones estimate of 0.4%.
But on a 12-month basis, the CPI rose 3.4%, in line with expectations.
Excluding food and energy, headline core inflation reading came in at 0.3% monthly and 3.6% yearly, both as expected. The 12-month core inflation reading was the lowest since April 2021 while the monthly increase was the smallest since December.
Markets reacted positively after the CPI release, with futures linked to major stock indexes rising and Treasury yields falling. Futures traders raised the implied possibility that the Federal Reserve will start cutting interest rates in September.
“This is the first edition in a month that wasn't hotter than expected, so there's a comfortable rise,” said Dan North, chief economist at Allianz Trade North America. “The excitement is a little over the top. This is not Caitlin Clark. She's sexy, and this isn't sexy.”
In other economic news on Wednesday, the Commerce Department reported that retail sales were flat during the month, compared with estimates for a 0.4% increase. This figure is adjusted for seasonality rather than inflation, indicating that consumers have not kept up with the pace of price increases.
For the inflation report, price gains during the month were largely driven by increases in both shelter and energy.
Shelter costs, which have been a particular concern for Federal Reserve officials who expect inflation to decline this year, rose 0.4% during the month and were up 5.5% from a year ago. Both are uncomfortably high levels for the Fed, which is trying to push overall inflation down to 2%.
The energy index rose 1.1% over a month and increased 2.6% year-on-year. Food was flat and up 2.2% respectively. Used and new car prices, which contributed to the early rise in inflation during the worst of the Covid pandemic, fell by 1.4% and 0.4%, respectively.
Areas that showed notable gains during the month included apparel (1.2%), transportation services (0.9%), and medical care services (0.4%). As for transportation services, the annual increase reached 11.2%. Services excluding energy, a key point for policymakers, rose 0.4% month-on-month and rose 5.3% year-on-year.
The increase in inflation was bad news for workers, who saw earnings fall by 0.2% on a monthly basis when adjusted for inflation. On a 12-month basis, real earnings rose by just 0.5%.
In the shelter components, both base housing rent and significant landlord rent, or what homeowners think they can get to rent their property, both rose 0.4% month-on-month. They rose by 5.4% and 5.8% respectively on a 12-month basis.
Retail sales are disappointing
It appears that consumers are still feeling the pinch of price hikes during the month.
Advance estimates for April retail sales showed no change month over month after a downwardly revised 0.6% increase in March. However, sales were up 3% over last year. Excluding automobiles, sales rose 0.2%, in line with Dow Jones estimates.
A 1.2% decline in online revenue dragged down the sales figure, as did a 0.9% decline in sporting goods and related stores, while motor vehicle and parts dealers recorded a 0.8% decline.
Gasoline stations, supported by higher prices at pumping stations, recorded a 3.1% jump, while electronics and appliances saw a 1.5% increase.
The so-called control group, which excludes a number of items and feeds into the Commerce Department's GDP calculations, fell 0.3%.
“The weaker-than-expected retail sales number should be watched,” said Seema Shah, chief global strategist at Principal Asset. “A cooling in consumer spending is a good thing, but if that turns into a deeper slowdown, it could herald some economic problems that markets will not welcome.” administration.
A dilemma for the Federal Reserve
These reports come as the Fed has been on hold since July 2023 as inflation has proven more resilient than expected. Policymakers have said in recent weeks they need more evidence that inflation is on a sustainable path back to their 2% target before agreeing to cut interest rates.
The Fed's benchmark overnight lending rate targets a range of 5.25%-5.5%, the highest level in 23 years.
In his remarks on Tuesday, Federal Reserve Chair Jerome Powell acknowledged that readings earlier in 2024 were higher than expected and said the central bank would likely need to keep monetary policy “at the current rate for longer than thought.”
For financial markets, this means the Fed will likely wait until the end of the summer for better inflation data, with an initial rate cut in September. This will be the first reduction since the early days of the Covid pandemic in 2020.
“We think September at the earliest is when they will cut rates,” said North, the Allianz economist. “Their view seems to be that we are in no rush to cut interest rates. Inflation is nowhere near 2%, the economy is fine, and we won't do anything for several months.”
Federal Reserve officials raised the key overnight funds rate 11 times from March 2022 through July 2023, hoping that would help reduce demand that has pushed inflation to its highest level in more than 40 years. Policymakers had believed inflation would pass once supply chain problems caused by the pandemic eased, but strong demand fueled by fiscal and monetary policy stimulus kept price pressures high.
