Inflation slowed for the 10th straight month in April, a closely watched report showed on Wednesday, good news for American households struggling under the burden of higher costs and for policymakers in Washington as they try to vie for hikes. pricing fast.
The Consumer Price Index rose 4.9 percent in April from a year earlier, less than the 5 percent expected by economists in a Bloomberg survey. Inflation has dropped notably from a peak of just above 9% last summer, although it has remained well above the normal 2% annual earnings pre-pandemic.
Cheaper prices on airline tickets, new cars and groceries, including eggs and produce, helped to reduce inflation last month, even as gas prices and rents rose rapidly. In a key change, prices for some services have slowed – a bright spot for the Federal Reserve, which has been raising interest rates to slow the economy and fight inflation. Central bankers have been watching service costs carefully, in part because they have been stubborn.
The report also provided good news for President Biden. Inflation has plagued voters for more than two years, weighing on the president’s approval ratings. As prices rise less dramatically with each passing month, they may become less of a pressing concern.
However, economists cautioned against overstating the progress: while inflation is showing positive signs of cooling, some of the decline since last summer has come as supply chains have healed. Without that easy fruit, it could be a long and bumpy road back to a normal inflation rate.
“Inflation is still sticky; I don’t think the Fed is going to look at this and cut rates, or breathe a big sigh of relief,” said Priya Misra, head of global rate research at TD Securities. “Not so fast. We cannot conclude that the inflation problem is over.”
Even so, stock prices soared in response to the data, as investors – who tend to prefer lower interest rates – took it as good news for the Fed.
After stripping out food and fuel to get a sense of the underlying trend in price increases – what economists call the core measure – consumer prices rose 5.5 percent from a year earlier, a slight slowdown from 5.6 percent. percent on the previous reading.
And a closely watched measure of utility prices outside of housing costs fell even more significantly. That was an encouraging sign that a stubborn component of inflation is finally about to burst, but it was also driven in part by a moderation in travel spending that may not last, said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives.
That slowdown offered “a little bit of good news, but also probably a little bit of a lie,” she said.
Although inflation gradually cooled for months, it remained too high for policymakers.
Much of the slowdown in price increases came as supply chain bottlenecks that emerged during the height of the pandemic were resolved, allowing shortages of goods to ease. Energy prices also declined after a spike in the summer of 2022 linked to Russia’s invasion of Ukraine.
But the underlying trends that could keep inflation persistently high over time have remained intact, including extraordinarily strong wage growth that could lead companies to try to charge more.
That’s one reason Fed officials have been paying so much attention to utility prices: they tend to be more responsive to economic strength and can be difficult to slow down once they rise.
There are reasons to expect more measured services inflation in the coming months. Rents have started to rise more slowly on market-based trackers, which should start showing up in official inflation data.
But the question is whether the Fed has slowed the economy down enough that other prices for services — like travel, manicures, day care and health care — will follow suit.
Central bankers raised interest rates last year at the fastest pace since the 1980s to slow borrowing and hurt growth, pushing borrowing costs above 5 percent this month.
These increases have made it more expensive to borrow money to buy a home or expand a business. As growth cools and companies compete less aggressively for workers, wage growth has already started to slow. This chain reaction is expected to dampen demand, which could make it harder for companies to raise prices without scaring off customers.
But the full effect of the Fed’s moves is still playing out. The fallout could be intensified by a series of recent major bank failures, which could make other creditors nervous and cause them to pull back on lending.
And Congress is closing in on a showdown over raising the country’s debt limit, which could also shape the outlook: If markets panic as Democrats and Republicans struggle to reach a deal and investors fear the government American does not pay his bills, this could happen to damage the economy.
Democrats warned that boldness could undermine progress in a strong economy as inflation slows, while Republicans argued on Wednesday that rapid inflation is evidence they are right to demand spending cuts.
With so many factors poised to weaken the economy, Fed officials are now weighing whether they need to raise borrowing costs further or whether their measures so far will be enough to guide inflation back to normal. John C. Williams, president of the Federal Reserve Bank of New York, told reporters in New York on Tuesday that the Fed’s next decision — whether to raise rates or take a break — would depend on the incoming data.
“We will adjust policy going forward based on what we see out there,” he said.
Policymakers will receive the May consumer price report on June 13, one day before their decision, but policymakers usually give markets at least a hint of what they can do with rates ahead of time. Given this, central bankers are likely to pay close attention to the April inflation report.
Fed officials will also receive May jobs data and a reading of the consumer spending price index – the measure they officially target in their 2 percent inflation target, but which comes later than expected – before their next meeting. The measure of personal consumption is based in part on data from the consumer price report.
For now, the new inflation numbers are probably not enough to convince policymakers that they should change course and cut interest rates any time soon, economists said.
“That probably keeps them on track to take a break at the next meeting,” said Rosner-Warburton.