US inflation was slightly weaker than forecast in April, in a positive sign that the Federal Reserve’s cycle of interest rate rises is bringing price rises under control.
Consumer price inflation dipped to an annual rate of 4.9 per cent, its lowest level since April 2021. Economists had expected it to remain steady at 5 per cent.
Lower airline fares helped bring down the total, though inflation remained strong in some areas such as used car prices and still has some way to go to meet the central bank’s 2 per cent target.
In particular core inflation, which strips out more volatile food and energy costs, has remained stubbornly high for the last few months. It dipped slightly in April to 5.5 per cent year-on-year, but has barely moved since the end of last year.
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On a monthly basis, the headline CPI index rose 0.4 per cent, while the core number rose by the same amount.
The overall pace of price increases has slowed substantially from the 40-year highs of last summer, leading Fed chairman Jay Powell to declare last week that “we’re getting close or maybe even [finished]” with interest rate rises.
The central bank’s benchmark rate has risen from close to zero at the beginning of last year to a range of 5 per cent to 5.25 per cent.
The two-year Treasury yield, which closely tracks rate expectations, fell to session lows immediately after the data was released, as investors grew more confident that the Fed would not need to make further rate rises.
Investors have for some time bet that a pause in the Fed’s campaign to lower inflation would be swiftly followed by a string of rate cuts, despite caution from Fed officials.
The central bank has warned the recent banking turmoil could result in a credit crunch that would slow the economy and have a similar effect to further rate tightening.
However, several recent data releases have highlighted the strength of inflationary pressures, and Mr Powell last week signalled it would not be appropriate to cut rates if prices were slow to recede.
Jobs figures released last Friday showed the labour market – a key driver of inflation – remained hotter than expected, while an alternative measure of core inflation also came in stronger than forecasts late last month.
Futures markets suggest investors have dialled back their expectations for how quickly the Fed will pivot to rate cuts since the jobs data, but still see a strong likelihood of cuts by the end of the year.
Although Wednesday’s figures will be closely scrutinised for clues on the inflation trajectory, NatWest Markets’ Kevin Cummins noted before the release that “the April data will not be definitive” for deciding the Fed’s next steps, as another month of CPI data will be published shortly before its next policy meeting.
Meanwhile, investors and policymakers will also be paying attention to updated figures on producer price inflation to be published on Thursday, and consumer inflation expectations on Friday. – Copyright The Financial Times Limited 2023
