US inflation resumes downward trend, eases to 0.3% in April; core CPI cools for first time in 6 months

US inflation rose less-than-expected in April 2024, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to Wall Street expectations for a September interest rate cut by the US Federal Reserve. The US consumer price index (CPI) rose 0.3 per cent sequentially, according to data released by the Labor Department's Bureau of Labor Statistics on May 15.

In the 12 months through April, the CPI increased 3.4 per cent year-on-year (YoY), which follows a 3.5 per cent rise in March 2024. The annual increase in consumer prices has dropped from a peak of 9.1 per cent in June 2022, however the progress has since slowed. The April CPI data marks the first month of slowing annual data since January 2024.

The so-called core CPI — which excludes food and energy costs — rose 0.3 per cent in April, snapping a three-month streak of above-forecast readings which spurred concerns that inflation is getting sticky in the world's largest economy. Economists see the core gauge as a better indicator of underlying inflation than the overall CPI.

The core CPI increased 3.6 per cent in the 12 months through April. This was the smallest YoY gain since April 2021- the slowest pace in three years, and followed a 3.8 per cent rise in March. The core CPI over the past three months increased an annualized 4.1 per cent, the smallest since the start of the year. 

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US inflation: Key metrics

Shelter prices, which is the largest category within services and includes rent, climbed 0.4 per cent for a third month. Gasoline prices shot up 2.8 per cent. These two categories contributed over 70 per cent of the increase in the CPI. Owners’ equivalent rent — a subset of shelter, which is the biggest individual component of the CPI — rose by 0.4 per cent.

Robust housing costs are a key reason why inflation not only in the US, but also in many other developed economies has refused to decline. Food prices were unchanged. Prices at the supermarket fell 0.2, with eggs dropping 7.3 per cent. Meat, fish, fruits and vegetables as well as nonalcoholic beverages were also cheaper. But cereals and bakery products cost more, while prices for dairy products rose marginally.

Motor vehicle insurance increased 1.8 per cent after rising 2.6 per cent in March. Prices of personal care, recreation and education increased. The cost of healthcare rose 0.4 per cent, reflecting an increase in hospital services. Used cars and trucks prices dropped for a second consecutive month. New motor vehicle prices clocked a third straight monthly decline. Prices for household furnishings and operations also fell. Core goods deflation continued, though the pace slowed.

Also Read: US inflation beats Wall Street estimates, rises 0.4% in March; Fed's June rate cut hopes fade away

In US, inflation is still being driven by providers of services like motor vehicle insurance, housing and healthcare catching up to higher costs. Based on the CPI and producer price index data, economists estimated that the core personal consumption expenditures price index rose 0.2 per cent in April after a 0.3 per cent rise in March. That would lower the annual increase in core inflation to 2.7 per cent from 2.8 per cent in March 2024.

Fed's rate cut hopes bolstered by macro data

The US Fed is trying to control price pressures by weakening demand in the economy. Hopes of the US central bank starting its easing cycle this year were further bolstered by other data today showing that the retail sales came in unexpectedly flat in April. 

A separate report from the Commerce Department's Census Bureau showed retail sales unchanged in April after increasing 0.6 per cent in March. The reports suggested that domestic demand was cooling, which will be welcomed by officials at the US central bank as they try to engineer a "soft-landing" for the economy.

Also Read: Wall Street today: US stocks surge after inflation data, Treasury yields ease

Sales rose three per cent YoY in April. The sales at online retailers dropped 1.2 per cent after surging 2.5 per cent in March. Sales at food services and drinking places, the only services component in the report, gained 0.2 per cent. The economists view dining out as a key indicator of household finances.

While the figures may offer Fed policymakers some hope that inflation is resuming its downward trend, officials will want to see additional readings to gain the confidence they need to start thinking about cutting interest rates. Fed chair Jerome Powell said Tuesday the central bank will “need to be patient and let restrictive policy do its work,” and some policymakers don’t expect to cut rates at all this year.

Earlier this month, the central bank left its benchmark overnight interest rate unchanged in the current 5.25 per cent-5.50 per cent range for the sixth straight meeting where it has been since July 2023. The US Fed has raised its policy rate by 525 basis points since March 2022 and has said that rates will remain at the 23-year high mark until inflation cools and moves consistently to the target range.
 

Experts see Fed rate cuts closer than before

Economists expect price pressures to decline this quarter, and inflation to gradually move toward the Fed's target as the labor market is cooling. ‘’Some decision-makers don’t anticipate cutting rates at all this year. In an attempt to control price pressures, the central bank is reducing demand throughout the economy,'' said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.

The data is a very powerful boost for long-term government bonds in India and much of the emerging market world. It will also boost assets like equities and precious metals, according to the founder of the SEBI registered multi-asset PMS.

 “There is a lot to cheer for in the latest consumer price index imprint. For one, Chair Jerome Powell’s oft-repeated refrain of inflation moving on “a sometimes-bumpy road towards two per cent” is playing out…Slowly but surely, inflation is yielding ground, even if it with a response lag,'' said Yogesh Kansal, Co-founder & CMO, Appreciate.

‘’A response lag is the time it takes for a monetary or fiscal decision to start delivering actual economic impact…The dent in inflation is becoming apparent, albeit with a few adverse statistical bumps as seen in the first quarter of FY24,'' he said.

Analysts noted that the April CPI imprint, by itself, is not enough for the Fed to flag off a rate cut, and the downward trend will have to concretise in the coming months for the Fed to confidently move towards a rate cut.

‘’Nevertheless, the report should be music to markets’ ears given that it gives the Federal Reserve more leeway to hold rates steady. A plus point would be the fact that there are no hidden triggers in the CPI report that could stoke fears of a rate hike,'' added Kansal.

US markets saw a roughly 73 per cent probably of a rate cut in September, up from 69 per cent before the release of the CPI data. A few economists anticipate the Fed will start lowering borrowing costs in July.

The US CPI data for May will be released on June 12.

With inputs from Reuters, Bloomberg