The Labor Department’s Bureau of Labor Statistics reported that U.S. consumer prices increased less than expected in April, with the consumer price index rising 0.3% after advancing 0.4% in March and February. Economists had forecasted a 0.4% increase on the month and a 3.4% increase year-on-year, however, the CPI only rose 3.4% in the 12 months through April. This suggests that inflation has resumed its downward trend at the start of the second quarter, boosting financial market expectations for a potential September interest rate cut.
The annual increase in consumer prices has dropped from a peak of 9.1% in June 2022, despite some progress. Inflation had accelerated in the first quarter due to strong domestic demand, after moderating for much of last year. However, last month’s slowdown in CPI was a relief after data on producer prices showed a significant increase in April. Economists attribute inflation to services providers catching up to higher costs, such as motor vehicle insurance, housing, and healthcare. They expect inflation pressures to ease in the current quarter and prices to gradually move towards the Federal Reserve’s 2% target, as the labor market cools.
Federal Reserve Chair Jerome Powell expressed his expectations that inflation will move back down to lower levels similar to those seen last year. Financial markets anticipate that the Fed will start lowering borrowing costs in September, with a small group of economists suggesting that a rate cut could come as early as July. However, the central bank left its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July. Since March 2022, the Fed has raised its policy rate by 525 basis points.
Excluding the volatile food and energy components, the core CPI rose 0.3% in April after advancing 0.4% in March. In the 12 months through April, the core CPI increased 3.6%, marking the smallest year-on-year gain since April 2021 following a 3.8% increase in March. The gradual increase in core CPI suggests that inflation may be easing slightly, which could further support the possibility of an interest rate cut in the coming months. Overall, the data on consumer prices in April indicates a slight decrease in inflationary pressures and a potential shift towards monetary policy adjustments by the Federal Reserve.
