Inflation cooled moderately last month, with prices rising by less than 5% on an annual basis for the first time in two years. The slower rate of inflation, which came in below economists' expectations, should give the Federal Reserve room to pause its long campaign of interest rate hikes at the next Fed meeting.
The Consumer Price Index (CPI) for April rose 4.9% year-over-year, vs March's gain of 5%, the Bureau of Labor Statistics (opens in new tab) said Wednesday. The Federal Reserve Bank of Cleveland's (opens in new tab) "Nowcast" forecast annual inflation to increase by 5.2%.
On a monthly basis, the CPI increased by 0.4% compared with March's gain of 0.1%. Economists expected monthly CPI to rise 0.6%.
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Perhaps most important, core CPI, which excludes volatile food and energy prices, also came in lower than expected. Stubbornly elevated core inflation has contributed to the Fed's reluctance to stop raising interest rates. On an annual basis, core CPI rose 5.5% in April, vs estimates for a gain of 5.6%. March's year-over-year core CPI reading also came in at 5.6%.
Monthly core CPI rose 0.4% in April. Although that was the same rate of inflation seen in March, it did come in below forecasts for a 0.5% increase month-to-month.
Fed Chair Jerome Powell and the central bank's rate-setting group, known as the Federal Open Market Committee (FOMC), are open to what is being called a "hawkish pause" when it next meets in June. However, Powell has emphasized that future rate decisions will be "data dependent."
Although there will be another CPI report to digest before the FOMC's June policy decision – as well as plenty of other economic data, including the Fed's preferred inflation gauge known as the Personal Consumption Expenditures Price Index (PCE) – experts mostly agree that the April CPI report helps the case for the FOMC to pause its campaign of interest rate hikes.
The Fed lifted interest rates for a 10th consecutive time when it last met in early May. The quarter-point rate hike brought the short-term federal funds target rate up to a range of 5.0% to 5.25%. As of May 10, interest rate traders assigned an 87% probability to the FOMC pausing when it wraps up its regularly scheduled two-day meeting on June 14. By the same token, traders were betting on a 13% chance the Fed would raise the fed funds rate by another 25 basis points, or 0.25%.
With the April CPI report now a matter of record, we turned to economists, strategists, investment officers and other experts to get their takes on what the inflation data means for markets, macroeconomics and monetary policy going forward. As usual, they don't exactly agree on every point. Below please find a selection of their commentary, sometimes edited for brevity or clarity.
Expert takes on the CPI report
"The April CPI report was largely in line with forecasters' expectations. The 0.4% increase in both the headline and core CPI pointed to an inflation backdrop that is improving incrementally rather than rapidly. Falling prices at the grocery store and for energy services helped to offset an increase in gasoline prices in April, while an outsized jump in used auto prices was similarly tempered by declines in prices for travel related services such as airfares and lodging away from home. On balance, today's report does not materially change our outlook for inflation or Fed policy. We expect the FOMC to maintain the federal funds rate at its current level for the foreseeable future and for inflation to slow further in the months ahead as supply pressures continue to ease and demand growth weakens." – Sarah House, senior economist at Wells Fargo Economics (opens in new tab)
"There's a little something in the CPI report for both FOMC hawks and doves. The still meaty core price increase (with its 5.1% annualized 3-month rate) will dissuade any thoughts of near-term rate cuts. However, signs of cooler services inflation should support a rate pause in June, and, we suspect, the remainder of the year." – Sal Guatieri, senior economist at BMO Capital Markets (opens in new tab)
"Inflation has finally surprised on the downside. Core CPI, however, especially in the areas of transportation and shelter, is proving stickier than expected. Nonetheless, this data point should fortify the view that the Fed will indeed pause in raising rates. The markets should like this." – Ben Vaske, investment strategist at Orion Portfolio Solutions (opens in new tab)
"Shelter costs, which have a very large weight in the Consumer Price Index, slowed down considerably from previous months, up 0.4%. This was the lowest increase in shelter costs since January of 2022 and could be pointing to further weakness in shelter costs going forward. This is in line with market expectations and could help accelerate the disinflation process going forward, which should be good for the Federal Reserve as well as for markets." – Eugenio Alemán, chief economist at Raymond James (opens in new tab)
"Today's CPI report continues to depict inflation that is just too high for most people's good, especially the Federal Reserve’s. In fact, the report showed that inflation remains remarkably sticky, which doesn't correspond to virtually any practical thinker's timeline of when inflation might be expected to start to come down further. Could the FOMC hike one more time at its next meeting on news of such sticky inflation? Maybe, but today's interest rate levels are very restrictive and will bite into pricing power, real estate financing and clearly are impacting credit contraction in the banking sector." – Rick Rieder, BlackRock's chief investment officer of Global Fixed Income (opens in new tab) and head of the BlackRock Global Allocation Investment Team
"The inflationary fever continues to break. Shelter costs are steadily dropping, which will likely continue because of the lag in the data. The [year-over-year comparisons] will also get easier as we move 12 months past the big surge of prices last spring. All of this makes the Fed's job a lot easier into the summer. Today was the first time that CPI dropped under 5% year-over-year. It's a nice psychological number and less than expected by economists. It was also the first time inflation dropped under the current Fed rate, which makes the idea of a cut much more realistic this year." – David Russell, vice president of market intelligence at TradeStation (opens in new tab)
"April inflation metrics all but confirm expectations that the Fed will not hike rates next month and as inflation and the economy slows further in the coming months, the Fed could justify an outright cut in rates. Risk assets will likely become more attractive as investors digest this latest inflation report." – Jeffrey Roach, chief economist at LPL Financial (opens in new tab)
"Some very critical components that had acted as pervasive sources of upward price pressure are now reversing course; and the stubborn areas like rents and used cars are complete statistical anomalies since we all know what is happening to both segments in real-time — as in, deflating." – David Rosenberg, founder and president of Rosenberg Research (opens in new tab)
"The case for a pause was pretty well quashed with today's inflation report, and the likelihood of a rate cut later this year is becoming more of a fantasy. Inflation is only slowly melting away while the labor market remains tight with significant pressure on wages, pushing us in the opposite direction of what the Fed is trying to achieve with interest rate hikes." – Sean Snaith, director of the University of Central Florida's Institute for Economic Forecasting (opens in new tab)
"Overall, a vanilla print with nothing glaring, with month-over-month numbers still annualizing near 5%. It's a positive that the federal funds rate is now greater than inflation. It's unlikely this number solves much of anything and reiterates the need to hold rates at current levels." – John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors (opens in new tab)
"The key part of the report is certainly the core CPI, which has stalled since the beginning of the year, and we believe that the core number must decline significantly, by another half a percentage point or more, before the Fed will consider a pivot. Considering the Fed's projections from March, the median participant indicated that today's current fed funds target range of 5.0% to 5.25% would likely be sufficiently restrictive. Collateral effects to the banking system and areas like commercial real estate due to the dramatic rise in rates are certainly on the radar of the Fed, which would suggest further reinforcement of a pause in rates given today's CPI number." – Ivan Gruhl, chief investment officer at Avantax (opens in new tab)
"The fight against inflation is not over and it is too early for investors to cheer victory. The Federal Reserve is still having to combat an employment market that is continuing to hire at an impressive pace with continued strong wage growth. What the Fed needs is a significant loosening of the labor market and my fear is that it will take more rate hikes to accomplish that goal." – David Nicholas, portfolio manager at XFUNDS (opens in new tab) and president and founder of Nicholas Wealth Management
"The sub-component [of CPI] Powell cares the most about though is core services ex-shelter, which was only 0.11% and is the lowest point since September 2021. This makes the odds of a June hike almost negligible in my eyes from around 15% going into the data. Maybe rate hikes are starting to have an effect on data." – Clive Ponsonby, currency fellow at Hedder (opens in new tab)
"Like previous months, shelter was the biggest contributor to inflation, but gasoline and used cars and trucks also contributed this month. Inflation is falling, albeit slowly, and is still above the Fed's 2% inflation target. To a large extent, shelter inflation is lagged because of the way the BLS measures changes in rent and 'owners' equivalent of rent.' This means we may see inflation fall more rapidly later this year." – Patrick Horan, economist at the Mercatus Center (opens in new tab)
"Inflation is continuing on a welcome downtrend, but at a suboptimal cadence. Goods inflation had been decelerating, but April’s print showed a reversal as gas and used vehicle prices spiked. Reports suggest that wholesale prices for used cars have declined more recently, which should appear in the May or June CPI reports. Meanwhile, core services inflation moderated only slightly in April and remains well above levels needed to return to the Federal Reserve’s target. Overall, the headline figure for inflation was strong, but the details of this report are not substantial enough to suggest additional rate hikes remain on the horizon at this time." – Noah Yosif, economist at the National Association of Federally-Insured Credit Unions (opens in new tab)
"Wednesday's weaker-than-expected Consumer Price Index print once again confirms the disinflation narrative that has taken shape over the past year. It solidifies the need for the Federal Reserve to stop raising interest rates, which the central bank should have done months ago. Inflation is coming down and it's time for the Federal Reserve to realize this." – David Bahnsen, chief investment officer at the Bahnsen Group (opens in new tab)
"The continued slide in year-over-year inflation means the bond party should continue. The decline in long-term rates should also benefit growth equities via multiple expansion, a development that has been taking place since the turn of the year. Equity investors who wait until the Fed pauses the rate hike cycle to deploy new money may miss out on significant gains. The inflation story is in the rear-view mirror." – Peter Essele, head of portfolio management at Commonwealth Financial Network (opens in new tab)
"The highly anticipated CPI data brought a huge sigh of relief for investors as today’s data points signaled some progress towards bringing down elevated inflation levels. Within the data, there was an improvement on the service side led by declines in airfares and hotels. On the flip side, the strength in used cars and shelter kept annualized inflation levels from declining further. The key takeaway for us is seeing core services ex-housing, something the Fed is paying close attention to, moving in the right direction. On balance, the in-line report should provide a runway for the Fed's conditional-pause in rate hikes as further progress on bringing down inflation is evident." – Charlie Ripley, senior investment strategist at Allianz Investment Management (opens in new tab)
"The Fed's May policy statement kept the door open to another rate hike at their next decision in June, but the CPI report suggests they are pretty unlikely to walk through it. So the U.S. rate hike cycle is most likely over." – Bill Adams, chief economist at Comerica Bank (opens in new tab)
