Last month, the U.S. Consumer Price Index (CPI) inflation rate slowed to its lowest level in about two years. This indicator came out shortly after the Federal Reserve (Fed) hinted that its more than one-year-long series of interest rate hikes was nearing its end. As it was confirmed that U.S. inflation is steadily easing, expectations that the Fed will halt rate hikes starting in June have gained more weight. However, since inflation still exceeds the Fed’s price stability target, there are also many remarks pointing out that there is still a long way to go.
U.S. April CPI Up 4.9%... Inflation Rise Slows for 10th Consecutive Month
According to the U.S. Department of Labor on the 10th (local time), the April CPI rose 4.9% compared to the same month last year. This is the smallest increase since April 2021 and also below Wall Street experts’ forecast of 5.0%. It was also lower than the 5.0% increase in March, continuing a slowdown trend for the 10th consecutive month. This figure is significantly down from the peak of around 9% in June last year. The April CPI rose 0.4% compared to the previous month, matching Wall Street expectations.
The core CPI, which excludes the volatile energy and food sectors, increased 5.5% year-over-year and 0.4% month-over-month. This also met market expectations. The market had been concerned that the core CPI, which rebounded to 5.6% year-over-year in March, might confirm “sticky core inflation” again this month.
Specifically, housing costs including rent rose 8.1% year-over-year and 0.4% month-over-month, driving overall inflation. Gasoline and used car prices also increased by 4.4%. Energy prices rose 0.6% over the month, with gasoline prices jumping more than 3%. However, food prices remained flat. The Department of Labor stated, “Last month, housing cost increases accounted for 60% of the total core CPI rise,” adding, “While this is a step in the right direction, levels still exceed those before the pandemic.”
85% Expectation for Rate Hold in June... Attention on Next Day’s PPI
This CPI report drew attention as it was released shortly after the Fed indicated at the May Federal Open Market Committee (FOMC) meeting last week that it would likely hold rates steady going forward. Having raised rates 10 consecutive times over the past year to a range of 5.0?5.25%, it was time for the effects of cumulative tightening policies to show in the data. Additionally, the unexpectedly strong April employment report released on the 5th raised concerns that if inflation data this week also exceeded expectations, the Fed’s hawkish (monetary tightening preference) stance could intensify again.
For now, the market is reassured by the inflation data coming in below expectations. Immediately after the CPI release, U.S. Treasury yields fell in the New York bond market, and the New York stock market showed gains in early trading. Quincy Crosby, Chief Global Strategist at LPL Financial, said, “Today’s report suggests that the Fed’s inflation suppression is working.”
With the confirmed trend of slowing inflation, expectations that the Fed will halt rate hikes starting from the June FOMC meeting have gained more weight. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of the morning of this day, federal funds futures markets reflect more than an 87% chance that the Fed will hold rates steady in June. The probability of an additional “baby step” (a 0.25 percentage point rate hike) has dropped to around 13%, down from 21% the previous day.
Moreover, despite Fed Chair Jerome Powell’s firm statement that there will be no rate cuts this year, futures markets still show bets on rate cuts as early as July to September. The recent slowdown in consumer spending, which had been strong earlier this year, also supports these expectations.
The following day, the April Producer Price Index (PPI), a wholesale price indicator, is scheduled to be released. Considering that wholesale price increases eventually pass through to consumer prices, a slowdown in the PPI trend can be interpreted as a signal that inflationary pressures have eased. The March PPI had fallen 0.5% month-over-month, marking the largest drop in about three years. Further declines are expected this time as well.
“Still High Levels” Keep Caution Alive
However, caution remains as inflation is still high. John Williams, President of the New York Federal Reserve Bank and considered the Fed’s third most influential figure, pointed out, “Due to policy lags, it will take time for FOMC actions to restore economic balance and bring inflation back to the 2% target.” He added, “I have not said that rate hikes are over,” and “Decisions will be data-driven,” signaling that rate hikes could resume depending on future inflation data. This is why some expect that even if the Fed holds rates in June, cutting the benchmark rate within the year will be difficult.
In a survey released earlier this week by the New York Fed, the one-year ahead inflation expectations (4.4%) fell by 0.3 percentage points from the previous month but still remained in the 4% range. This is more than double the Fed’s 2% price stability target. The three-year and five-year inflation expectations rose by 0.1 percentage points each to 2.9% and 2.6%, respectively, indicating that the Fed is expected to struggle to achieve its 2% inflation target even three to five years from now. Sarah House, Chief Economist at Wells Fargo, noted, “Consumers are still willing to pay for certain items and services.” Lindsay Piegza, Chief Economist at Stifel Financial, also assessed, “It will be difficult for the Fed not to take additional measures.”
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