CPI: The Hot Streak Ends — Evening Brief – 05.15.24      

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index increased 3.4% year-on-year in April, slightly less than the 3.5% increase seen in March. Core CPI, which excludes volatile food and energy expenses, climbed 3.6% year-on-year following a 3.8% increase in March. 

The CPI grew by 0.3% month on month in April, following a 0.4% increase in March. Core CPI rose 0.3%, following a 0.4% increase in March. “The index for shelter rose in April, as did the index for gasoline,” according to the BLS. “Combined, these two indexes contributed over 70% of the monthly increase in the index for all items.” 

The April CPI was expected to rise 0.4%, the same as in the March data. Meanwhile, the core CPI was expected to fall to 0.3% from 0.4% in March. On an annual basis, the April CPI was expected to reflect an inflation rate of 3.4%, up from 3.5% in March. Year-on-year, core CPI was expected to grow to 3.6% in April from 3.8% in March. 

On cue, the discussion over whether this inflation report was sufficient to tilt the balances in favor of an earlier rate cut has flared up again. The consensus seems to be that the inflation print was sufficient to keep September in play. 

“Core CPI was even better than it looked, particularly given that we already know the PPI components that feed into the Fed’s preferred PCE deflator measure came in, on balance, weaker than expected,” wrote Capital Economics. “We estimate that core PCE increased by around 0.20% month-on-month. All things considered this is consistent with the Fed cutting interest rates in September.”   

Inflation remains stubborn, and Fed officials are far from declaring mission accomplished. However, the five-month streak of dismal data has ended. It’s too early to tell whether the April trend will continue or if seasonal adjustments drove the first-quarter results. For the time being, however, officials are most likely pleased with the data. 

“Overall, price pressures remain elevated but are moving in the right direction. We think the data support the case for a patient approach on policy decisions from the Fed going forward although the base case remains one of lower rates this year,” said Rubeela Farooqi, chief US economist at High Frequency Economics. 

The markets are currently pricing in a roughly 73% probability of an interest rate cut in September, up from 69% before the data, which unleashed a flurry of buying in the equity markets. The S&P 500 reached a record intraday high a day after the Nasdaq Composite finished at an all-time high.