U.S. Inflation Cools For First Time This Year, All Eyes on Fed’s Next Move
Following three consecutive months of unexpectedly elevated readings, the April CPI report showed inflation decreased from 3.5% to 3.4%.
U.S. inflation showed signs of easing in April, providing a tentative relief for the Federal Reserve and potential political reprieve for President Joe Biden as he eyes re-election.
According to the data in the April Consumer Price Index (CPI) report released today by the Bureau of Labor Statistics, consumer prices increased by 0.3% from March to April, a slight decrease from the previous month, with the year-over-year rate ticking down from 3.5% to 3.4%.
This marks the first decline in annual inflation this year, following three months of elevated readings. Core inflation, excluding volatile food and energy prices, rose by 0.3% month-over-month, the lowest rate in three years.
This cooling of inflation is crucial for the Federal Reserve, which has been under pressure to manage price increases without derailing economic growth. Fed Chair Jerome Powell indicated that while the latest figures are a positive sign, more consistent data is needed before considering interest rate cuts.
The Fed has raised its key rate to a 23-year high of 5.3% through 11 hikes since March 2022, aiming to curb the highest inflation in four decades. Powell emphasized the need for “greater confidence” that inflation is on a sustained path toward the Fed’s 2% target before any rate reductions.
The April inflation data, combined with slower retail sales, had significant impacts on financial markets. Retail sales remained unchanged from March to April, missing expectations of a 0.4% increase, while core retail sales excluding autos rose by 0.2%, meeting forecasts. The S&P 500 responded positively, rising 0.8% and hitting a new intraday high as investors interpreted the data as a sign that the Fed might not need to raise rates further.
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Energy prices rose by 1.1% in April, while food prices remained flat. Notably, prices for new and used cars declined, contributing to the easing of inflation. However, housing costs, particularly rents, continued to rise, accounting for a significant portion of the overall increase in consumer prices. Powell pointed out that despite new apartment leases showing minimal increases, the overall rental market remains tight, a reflection of the government’s inflation measures.
The broader economic picture shows mixed signals. While the job market remains robust with healthy wage growth, a recent jobs report indicated a slowdown in hiring, with employers adding 175,000 jobs in April, a decline from previous months. Additionally, the GDP grew at an annual rate of 1.6% in the first quarter, down from 3.4% in the last quarter of 2023, suggesting a deceleration in economic activity.
Despite these signs of a slowdown, Powell cautioned against drawing definitive conclusions about the trajectory of inflation. The persistent inflationary pressures have been attributed to various factors, including strong consumer demand for services like travel and dining, which saw elevated prices. The outlook for inflation remains uncertain, with Powell noting the need for more data to determine whether the recent moderation is sustainable.
April’s inflation report provides cautious optimism that price increases may be slowing, aligning with the Fed’s goals. However, the economic landscape remains complex, with ongoing challenges in housing costs and mixed signals from other economic indicators.
The Fed’s approach will continue to be data-driven, with a close watch on inflation trends and their implications for future monetary policy.
With today’s release of the April inflation data, the odds of a Fed rate cut at the July 31st meeting currently sit at 34%, according to the Fed Watch Tool. The odds of a rate cut at the September 18th meeting is 75.6%.
All three major U.S. stock market indices closed the day in the green, with the S&P 500 finishing the day up +1.17% at 5,308.15. The NASDAQ Composite closed today up +1.4% at 16,742.39, with the Dow finishing up +0.88% at 39,908.
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