US annual inflation is slowing to less than 5%, and price pressures remain strong

WASHINGTON (Reuters) – The annual increase in U.S. consumer prices slowed to less than 5% in April for the first time in two years, while the main measure of inflation monitored by the Federal Reserve eased, potentially providing cover for the central bank for another pause to raise interest rates. next month.

However, inflation remains very strong, with a report from the Labor Department on Wednesday showing monthly consumer prices rose strongly due to flat rents as well as rebounds in gasoline and used car costs. The mixed report shattered the hopes of financial markets that the Federal Reserve would start cutting interest rates this year to support the economy.

“Today’s consumer inflation report supports the argument for the Fed to seriously consider halting rate hikes in June, but it does not support any rate cuts in the near term,” 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 increase was in line with economists’ expectations. Stubbornly high rents were a major cause of the increase in inflation.

However, there were pockets of convenience for consumers. Food prices remained unchanged for the second consecutive month. Grocery store prices fell 0.2% after declining 0.3% in March, marking consecutive declines for the first time since July 2019. Fruits, vegetables, meat, fish and eggs were cheaper compared to March. Milk prices fell 2.0%, the sharpest decline since February 2015.

Natural gas prices fell 4.9% and the cost of electricity fell for the second month in a row, tempering a 3.0% rise in gasoline prices, which followed a 4.6% decline in March.

The rebound came after Saudi Arabia and other OPEC+ oil producers announced further cuts in oil production. But oil prices have been on a much lower trend since then, pushing down gasoline costs while increasing recession risks, due to punitive Fed rate hikes, tightening credit conditions, and a deadlock over raising the federal government’s borrowing cap.

In the twelve months through April, the consumer price index increased by 4.9%. This was the smallest year-over-year rise since April 2021 and followed a 5.0% advance in March.

The annual consumer price index peaked at 9.1% last June, marking its largest increase since November 1981, and is easing as the initial rise in energy prices last year after Russia’s invasion of Ukraine fell out of favor.

“Overall, inflation is still very high and it won’t fall back to 2% if it increases 0.4% month-on-month,” said Chris Low, chief economist at FHN Financial in New York. “We need to see steady increases around 0.15% to get there.”

Stocks on Wall Street rose on relief that inflation readings did not beat expectations. The dollar fell against a basket of currencies. US Treasury bond prices rose.

Cooling blowing services

The inflation data came on the heels of last Friday’s employment report, which showed an acceleration in job and wage growth in April, as well as a decline in the unemployment rate to a 53-year low of 3.4%. It is one of two reports on inflation that Fed officials will present at their policy meeting scheduled for June 13-14.

The US central bank raised its benchmark overnight rate by another 25 basis points to a range of 5.00%-5.25% last week and signaled it may halt the fastest monetary tightening campaign since the 1980s, although it maintained a hawkish bias. The Fed has raised its policy rate by 500 basis points since March 2022.

Excluding the volatile food and energy components, the consumer price index rose 0.4% last month, matching the gain in March. In the twelve months through April, the so-called core CPI rose 5.5% after rising 5.6% in March.

The monthly core consumer price index was boosted by used car and truck prices, which rose 4.4%, the first increase since last June. This boosted commodity prices 0.6%, the largest number since mid-2022, after rising 0.2% in March.

Owner’s Equivalent Rent (OER), a measure of the amount homeowners will pay for rent or earn from renting their properties, rose 0.5% for the second month in a row. Although rents continued to put upward pressure on the core CPI, rent inflation is poised to decline.

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

With the cost of airline tickets falling 2.6% and hotel and motel rooms falling 3.0%, prices for services rose 0.2% after a 0.3% increase in March. Services excluding shelter rose 0.1% after remaining unchanged in the previous month. But the cost of entertainment and personal services has gone up.

By economists’ calculations, prices for essential services outside of housing rose 0.1% after rising 0.4% in March. It was the smallest gain in the so-called super core since July 2020. Super core prices are monitored by policymakers to gauge their progress in taming inflation.

However, some economists have cautioned against placing too much weight on the monthly core measure with CPI data. They said policymakers were more focused on the ultra-core measure in the Personal Consumption Expenditure (PCE) price index data, which was seen as less volatile.

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

“When Fed officials refer to this metric, they mean the PCE version, not the CPI,” said Oscar Munoz, a macro analyst at TD Securities in New York. “We expect this sector to gradually lose momentum as labor market conditions become less tight as the year progresses. A rally in June remains on the table.”

(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama

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