With US annual inflation falling below 5%, price pressures remain strong

  • The Consumer Price Index rose 0.4% in April
  • CPI rises 4.9% year-on-year
  • Core CPI gains 0.4%; An increase of 5.5% year-on-year

WASHINGTON, May 10 (Reuters) – The annual increase in U.S. consumer prices fell below 5% in April for the first time in two years, while a key inflation watchdog by the Federal Reserve eased, giving the central bank a cushion. Hold off on further interest rate hikes next month.

Still, inflation remains strong, with a report from the Labor Department showing on Wednesday that monthly consumer prices rose solidly due to sticky rents and increases in gasoline and used motor vehicle prices. The mixed report dashed financial market hopes that the central bank would start cutting rates this year to boost the economy.

“Today’s consumer inflation report supports the case that the Fed is seriously considering pausing a rate hike in June, but not favoring near-term rate cuts,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

The Consumer Price Index (CPI) rose 0.4% last month after rising 0.1% in March. The rise was in line with economists’ expectations. Persistently high rents lead to an increase in inflation.

However, there were pockets of relief for consumers. Food prices remained unchanged for the second consecutive month. Grocery store prices fell 0.3% in March and fell 0.2%, posting the first consecutive decline since July 2019. Fruits and vegetables, meat, fish and eggs are cheaper compared to March. Milk prices fell 2.0%, the most since February 2015.

Natural gas prices fell 4.9% and electricity prices fell for a second month in a row, blunting a 3.0% rise in gasoline prices following a 4.6% decline in March.

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The rebound came after Saudi Arabia and other OPEC+ oil producers announced further oil production cuts. But punitive rate hikes by the Federal Reserve, tighter credit conditions and an impasse in raising the federal government’s debt ceiling have pushed gasoline prices lower as oil prices have fallen sharply and risks of a recession have increased.

In the 12 months to April, the CPI rose 4.9%. This was the smallest year-over-year rise since April 2021 and followed a 5.0% advance in March.

Consumer prices fell 4.9% year over year, the 10th straight month of slowdown as prices reacted to the central bank’s rate-tightening cycle.

The annual CPI rose to 9.1% last June, its biggest increase since November 1981, and has been slowing since last year’s initial spike in energy prices following Russia’s invasion of Ukraine was taken out of the calculation.

“On balance, inflation is still high and if it’s 0.4% a month it’s not going to come down to 2%,” said Chris Lowe, chief economist at FHN Financial in New York. “We need to see consistent increases of 0.15% to get there.”

Wall Street stocks gained amid relief that inflation readings did not beat expectations. The dollar fell against a basket of currencies. US Treasury prices rose.

A shopping cart is seen at a department store in Manhattan, New York City, U.S., on June 10, 2022. REUTERS/Andrew Kelly/File Photo

Services inflation cooling

Inflation data followed last Friday’s jobs report, which showed job and wage growth accelerated in April and the unemployment rate fell to a 53-year low of 3.4%. It is one of two inflation reports that central bank officials will have on hand at the June 13-14 policy meeting.

The U.S. Federal Reserve last week raised its benchmark overnight interest rate by another 25 basis points to a range of 5.00%-5.25%, signaling that it may pause its tightening campaign since the 1980s. The central bank has raised its policy rate by 500 basis points from March 2022.

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Excluding volatile food and energy components, CPI rose 0.4% last month, matching March’s gain. In the 12 months to April, the so-called core CPI gained 5.5% after advancing 5.6% in March.

The monthly core CPI was boosted by prices for used cars and trucks, which rose 4.4%, the first gain since last June. It lifted core commodity prices by 0.6%, the most since mid-2022, after rising 0.2% in March.

Ownership equivalent rent (OER), a measure of how much homeowners pay in rent or earn from renting out their property, rose 0.5% for the second month in a row. Although rents continue to put upward pressure on core CPI, rent inflation eases.

The government reported last week that rental vacancy rates rose to a two-year high in the first quarter. Also, independent measures show rents on a downward trend and rent measures in the CPI lag the independent measures.

Air fares fell 2.6%, hotel and motel rooms fell 3.0%, and services rose 0.2%, up 0.3% in March. Services excluding accommodation rose 0.1% after being unchanged in the previous month. But the cost of entertainment and personal services increased.

Prices of core services outside housing rose 0.1% after rising 0.4% in March, according to economists’ calculations. This is the lowest gain in the so-called supercore since July 2020. Supercore prices are monitored by policymakers to gauge their progress in controlling inflation.

However, some economists cautioned against placing too much weight on the monthly supercore measure using CPI data. Policymakers focus more on the supercore gauge in personal consumption expenditures (PCE) price index data, which is considered less volatile.

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CPI and PCE price indices are calculated using different methods and weights.

“When federal officials refer to this metric, the PCE version is not the CPI,” said Oscar Munoz, macro strategist at TD Securities in New York. “As labor market conditions tighten as the year develops, our expectation is for the segment to gradually lose momentum. A June hike is still on schedule.”

Report by Lucia Mudigani; Editing by Chisu Nomiyama

Our Standards: Thomson Reuters Trust Principles.

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