• Consumer prices rose 0.4% MoM and 4.9% YoY in April

• Core CPI rises 0.4% MoM; up 5.5% YoY

• Core services excluding all rent rose only 0.1% in April

• US inflation showed signs of moderating in April, giving the Fed room to pause  interest-rate increases

Inflation eased slightly in April, the 10th straight month of cooling, but price gains  remain historically high as the broader economy cools.

The consumer price index (CPI) rose 4.9% YoY in April, the first reading below 5%  in two years. The inflation reading has eased from a recent peak of 9.1% in June  2022. However, US consumer prices rose 0.4 % MoM in April, up from a 0.1% gain  in the prior month. April's increase was driven by housing costs and an uptick in  gasoline prices. Used vehicle prices surged by 4.4% MoM, due to lack of inventory and snapping what had been nine consecutive months of declines while new car  prices ticked down 0.2%, their first monthly decline since April 2021. That likely  reflects increased manufacturer incentives and larger inventories. Energy prices  rose 0.6% MoM as higher gasoline prices (+3.0 MoM) more than offset the pullback  in energy service costs (-1.7% MoM). Energy index was down -5.1% YoY while food  prices were again flat on the month, pushing the year-ago measure down to 7.7%.

Core inflation (excludes food & energy) was up 0.4% MoM. Compared to last April,  core inflation remains elevated at 5.5%. Price growth across services (+0.4% MoM)  held steady in April. Good news in the report came from housing rents, a sector  the Fed anticipates will drive disinflation the rest of the year, and so far, it looks  promising. Shelter inflation cooled for the second straight month, rising by 0.4%  MoM, the lowest in a year, with gains spread across rent of primary residence and  owners’ equivalent rent. Primary rents increased 0.6% MoM, up from 0.5% in  March but down from a long stretch at 0.8% before that. Owners’ equivalent rents  also increased 0.5% MoM, same as the previous month, but down from the 0.7%  pace seen most of last year. Lodging away from home (-3.0% MoM) was lower on  the month, ending what had been five consecutive months of gains. The bad news  in the report is in core goods – which rose 0.6%, the fastest monthly gain since last  June 2022 - following March’s 0.2% rise. The acceleration was reflected in a 4.4%  increase in used-car prices, which is expected to continue in coming months based  on market dynamics and the upward trajectory.

Core goods prices rose by 0.6% MoM – an acceleration from March’s 0.2% MoM  gain. Most goods categories were higher on the month.

Stripping out housing, core services inflation decelerated sharply, rising 0.1% compared to the 0.5% and 0.4% increases seen in February and March,  respectively. A key contributor to this drop is the 0.2% decline in transportation  services, as airline fares dropped 2.6%. Also, in transportation services, prices paid  for motor-vehicle maintenance and repair rose 0.5%. This category is susceptible to increased volatility due to low collection rates since the pandemic, but also to  higher labor costs reported to price collectors in the field. Prices of car insurance  rose 1.4%. Meanwhile, the methodological quirk in health insurance continued to  drag down the overall medical-services index, producing a decrease of 0.1%.

US inflation showed signs of moderating in April, giving the Fed room to pause  interest-rate increases

There were definitely some encouraging signs in April’s CPI numbers. Inflation has been  persistent despite the Fed’s efforts to bring down prices. Starting in March 2022, the central  bank has enacted 10 consecutive interest rate increases totalling 5 percentage points, taking  benchmark borrowing rates to their highest level in nearly 16 years.

The CPI reading has cooled considerably since peaking out around 9% in June 2022. However,  inflation still has held well above the Fed’s 2% annual target. The April CPI report provides  both good and bad news on the inflation front as Fed officials weigh their next move on rates. Inflation is moderating, but one reason that Fed officials have remained worried about it is that it has been increasingly driven by services costs. Those can be really stubborn and hard  to stamp out. That said, there is a silver lining here, rents, which make up a big chunk of  services, are expected to slow their ascent in official inflation data in the coming months.

Shelter costs, which make up about one-third of the CPI weighting, increased another 0.4%  on the month and are now up 8.1% from a year ago. The monthly gain represented a step  down from previous months’ increases but was still indicative that a key inflation driver is  rising. With housing costs projected to decline, the Fed is focusing on “super core” inflation,  which excludes food, energy and shelter. That measure rose 0.4% for April and was up 3.7%  from a year ago. The monthly gain was slightly higher than the 0.3% in March while the annual pace was unchanged. Meanwhile, price growth across non-housing services  decelerated to its slowest month-on-month pace of growth in nearly two years.

That said, April’s CPI report shows how bumpy the road to disinflation is. Just when housing rents and some of the “supercore” services categories are making progress on disinflation,  core goods prices are going strong again. The Fed’s next interest-rate move boils down to  confidence in their year-end inflation forecast.

The CPI report for April suggests that inflation is cooling as a year’s worth of interest-rate  increases work their way through the economy. However, overall prices are still rising at a  brisk pace and the job market remains robust. The Fed will need to see more than one month  of data to be confident that price pressures are on a sustained downward path, especially  after officials hinted last week that they may be done hiking for now. That said, April’s report  will be one of several that factor into policymakers’ decision next month. They will also  receive the CPI for May, as well as reports on the labor market and their preferred inflation  measure, the personal consumption expenditures (PCE) index. Additionally, officials are still  monitoring the ongoing banking stress and to what extent that will further tighten credit  conditions. Markets have been betting on Federal Reserve rate cuts later this year. At the  May interest rate announcement, the Fed signalled that they were nearing the end of its  tightening cycle, but left the door open to further rate increases should the economic data  continue to surprise to the upside. At this point, it is still too early to say if another hike is in  the cards, particularly given the uncertainties surrounding the recent tightening in lending  standards and the potential knock-on effects it may have on the real economy.

While the April CPI report isn’t exactly reassuring, it also won’t jolt Fed officials into signalling  another rate hike in June, given their expectation that the full disinflationary impact from  tighter credit conditions has yet to show up. However, the slow progress in reducing core  inflation highlights how unlikely it is that the Fed will cut rates this year.

Source: BIMB Securities Research - 11 May 2023