The April Consumer Price Index (CPI) report was released on Wednesday morning, and the results weren’t as encouraging as those hoping for interest rates to fall this year.
The Fed’s goal of keeping inflation below 2% seems far away, with overall inflation rising by 0.3% in April. Rates have slowed after rising 0.4% over the past two months, but it’s doubtful a 0.1% drop will convince the Fed that inflation is falling as fast as it should. As of April, year-on-year inflation remained at 3.4% before seasonally adjusted.
The job market also shows no signs of slowing down. The latest data from the U.S. Bureau of Labor Statistics shows that the number of jobs continues to grow, and the unemployment rate is basically the same as in March. Nonfarm payrolls increased by 175,000 and the unemployment rate was 3.9%, which means it has remained in the same range (3.7%-3.9%) since August 2023.
Inflation and employment data are two key economic indicators that suggest economic conditions may hamper the Fed’s hopes of easing anti-inflation measures.
CPI report key facts
As in March, April’s inflation was driven primarily by rising housing and energy indexes. These two parameters together account for 70% of the monthly increase in the overall project index.
The energy index alone grew by 1.1%. This figure was primarily driven by continued increases in natural gas prices, which rose 2.8% in April and 5.2% on a seasonally adjusted basis. The energy index rose 2.6% from the same period last year.
In comparison, inflationary activity in commodities such as food is much smaller. The household food index fell 0.2%.
The rise and continued rise in the housing index
Fed economists generally pay less attention to food and energy inflation measures because they tend to be more volatile. They pay close attention to the “core” CPI component, which is all the index’s core items minus food and energy.
As of April, the annual core CPI rate excluding food and energy was 3.6%.
The housing index is the part of all project indices that deserves special attention.
In April, the housing index accounted for the largest increase in inflation among all items (excluding food and energy). The overall housing index increased by 0.4%; the rental index and the owner’s equivalent rent (OER) index increased by 0.4% from the previous month. Compared with the same period last year, the housing index increased by 5.5%, accounting for two-thirds of the annual increase in all projects (excluding food and energy).
Housing is a key component of the Inflation Index’s core services component. It is closely monitored by the Federal Reserve because it is one of the most reliable indicators of domestic economic performance. The OER metric alone (the amount of rent one would have to pay to replace an existing home) accounts for one-third of the CPI, making it a very important number. As of April, all indicators show that the housing economy is still growing, with growth being driven by the rental market.
Even though the housing component is excluded from the core services component of the CPI, we still saw growth in key areas such as motor vehicle insurance (up 1.8% month-on-month) and transportation services (up 0.9%).
So will the Fed cut interest rates?
The numbers make clear that inflation remains higher than needed to achieve the Fed’s sub-2% inflation target. All areas of special concern to the Fed, namely the core services sectors of the economy, have continued to grow.
The good news is that the CPI didn’t show any worrying spikes in inflation. That leaves the Fed cautiously optimistic about the overall direction of the economy and the possibility of a much-anticipated interest rate cut. On Tuesday, Fed Chairman Jerome Powell told the Foreign Bankers Association that he expects “inflation to fall back on a monthly basis to levels closer to last year’s lower readings.”
At the same time, Powell acknowledged that his confidence was “not as high as it has been” and that the inflation data was “higher than I think anyone expected.” His overall message is that high interest rates are here to stay, he said: “[We’ll] There is a need to be patient and let restrictive policies take effect.
Many speculate the Fed will begin cutting interest rates in the summer or early fall, in time for the presidential election. The central bank also wants months of reliable data before taking action.
Mary Daly of the San Francisco Fed said on the Macro Thinking podcast that it would be unwise to predict an unequivocal rate cut at this time, adding: “Right now, there’s a question about what inflation will look like in the coming months and what we should do. , there is great uncertainty.
In terms of inflation and rate cuts, we’re essentially in the same position we were a month ago: on the sidelines.
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