The U.S. Bureau of Labor Statistics’ latest Consumer Price Index (CPI) report revealed some slight easing in the consumer price picture, offering hope that the downward trajectory of inflation may be back on track.
The CPI, which tracks the costs of consumer goods and services, was up 0.3% in April, down modestly from a 0.4% gain in March. Year over year, the CPI has gained 3.4% — handily below recent inflation peaks but still well above the Federal Reserve’s 2% target.
A Reuters poll of economists had forecast a CPI gain of 0.4% month over month and 3.4% year over year.
Core CPI, which excludes volatile food and energy costs, was up 0.3% month over month and 3.6% year over year, both in line with expectations. On a monthly basis, the core reading is at its lowest since December, while annually, core CPI is at its lowest since April 2021.
Core goods prices remained on a downward trend, falling in April by 0.1% due almost wholly to deflation in automobile prices. The slowing of price growth in goods, both in core and total CPI, has been the primary driver of the inflation decline over the past two years, having returned generally to a pre-pandemic level.
Services, on the other hand, have been a different story. Prices for services excluding energy have grown 5.3% year on year; compare that to a 2.8% annual bump on average from 2015 to 2019. Shelter prices, which remain stubbornly high, account for a large part of that considering how heavily the category is weighted. Shelter costs rose by 0.4% for the third straight month in April. But even without taking shelter into account, services inflation has been problematic, noted Mark Fleming, chief economist at First American Financial Corp.
“There are two ‘inflation in-laws’ that just won’t leave — higher than long-run trend services-less-shelter inflation, which has been increasing in recent months, and shelter inflation that remains persistently above the historical trend,” Fleming said. “In fact, the index for shelter inflation increased 5.5% year over year in April, barely continuing its slow deceleration, and was a major contributor — given its very high weight in the ‘basket’ — to overall inflation.”
Because of the way the data is reported, shelter inflation can be slow to respond to market conditions, lagging the current picture by up to 12 to 18 months, Fleming estimated. As such, it’s likely the slowdown in rents over the past 12 months hasn’t yet fully factored into the inflation picture.
“But the most recent trend in market rents as a leading indicator of overall shelter inflation, is indicating increasing (or at least not further decreasing) rent inflation,” Fleming said. “A future headwind to overall shelter inflation returning to normal.”
Despite services inflation stickiness, April’s CPI appears to be a step in the right direction. A return to successively decreasing CPI readings would go a long way toward the Fed’s confidence that inflation is truly on a meaningful downtrend, and consequently toward a lowering cycle of the benchmark federal funds rate.
Markets responded well to the inflation drawdown, and Wells Fargo’s Economics Group termed April’s report “a start.” April’s data, at the very least, suggests that conditions are mostly on track for a potential rate cut in September, when many are projecting the Fed will make its first such move.
Any further reading into what it means past the near term, however, may be premature.
“People seem to think that the CPI numbers and inflation data this week is going to be a market mover — that we’re going to see that mortgage rates are going to move by probably a quarter percent one way or the other,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “So far this year, we haven’t seen the rate of inflation drop at all, and that’s kept mortgage rates higher.”
“There’s a whole lot that’s going to happen between now and September,” she added. “Because of where we are in terms of the data, the fact that it’s an election year [and] we have two wars going on in this world, it’s hard to make any long-term predictions.”
