Inflation cools, reassuring Fed after unexpectedly hot gains

Dive Brief:

  • The consumer price index excluding volatile food and energy prices rose last month at the slowest pace this year, giving Federal Reserve policymakers some relief from a barrage of first-quarter data that shook confidence inflation will steadily slow to their 2% goal.
  • So-called core CPI gained 0.3% in April compared with 0.4% during the prior month, and eased to 3.6% on an annual basis from 3.8% in March, the Bureau of Labor Statistics said Wednesday. Shelter costs rose 0.4% last month, pushing up core CPI more than any other category. Prices for transportation, apparel and medical care also increased.
  • “Inflation should show some signs of more material disinflation over the coming months as upside surprises in Q1 reverse and shelter inflation continues to soften, particularly” during the second half of this year, David Page, head of macroeconomic research at AXA IM, said in a report.

Dive Insight:

Fed Chair Jerome Powell has repeatedly said this month that unexpectedly high first-quarter inflation eroded his confidence that price pressures are falling steadily enough to warrant a reduction in the highest federal funds rate in 23 years.

“I would say my confidence in that is not as high as it was, having seen these readings in the first three months of the year,” Powell said Tuesday.

Investor speculation that cooling inflation will prompt the Fed to sooner trim borrowing costs pushed down the yield on the benchmark Treasury note on Wednesday by about 0.1 percentage point to 3.86%. Equity prices rose.

“Today’s data may be a relief relative to past months, and that should reduce any fears that the Fed might have to raise rates,” Eric Winograd, developed market research director at AllianceBernstein, said in an email.

Still, “today’s data are not good enough to move the policy needle,” Winograd said, forecasting that the central bank will not cut the main interest rate until the fourth quarter.

“Unless the labor market weakens appreciably, it will take several months of inflation steadily decelerating before the Fed will be comfortable cutting rates,” he said.

Traders in interest rate futures put 69% odds that the Fed will trim the main interest rate by at least 0.5 percentage point by the end of this year, compared with 57% odds on Tuesday, according to the CME FedWatch Tool.

“The Fed is making progress, but taming inflation is taking time,” Scott Helfstein, head of investment strategy at Global X, said in an email response to questions.

“The Fed will probably be patient,” Helfstein said, forecasting either no change to the federal funds rate this year or at most a quarter-point cut in December. “A stable rate and inflation environment, most importantly, is good for companies.”

Powell predicted that inflation will eventually slow to a more moderate pace. “I expect that inflation will move back down on a monthly level, on a monthly basis, to levels that were more like the lower readings we were having last year,” Powell said Tuesday.

A separate report Wednesday showed consumers may be pocketing their wallets in response to higher borrowing costs and the waning of savings built during the pandemic.

Retail sales in April were unchanged from March, the Census Bureau said, releasing data that was lower than expected by economists. Growth in retail sales in March was marked down to 0.6% from 0.7%.

Still, “the consumer is okay,” Helfstein said, predicting that “economic growth will likely be driven by corporate investment through the back part of the year.”

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