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US inflation shows signs of moderating, giving Fed room to pause

Bloomberg • 3 min read
US inflation shows signs of moderating, giving Fed room to pause
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US inflation showed signs of moderating in April, giving the Federal Reserve room to pause interest-rate increases soon.

The consumer price index rose by 4.9% from a year earlier, the first sub-5% reading in two years, a Bureau of Labor Statistics report showed Wednesday. Excluding food and energy, the so-called core consumer price index also cooled slightly.

A narrower price measure often cited by Fed officials — tracking services that have boomed as the pandemic faded — showed an even more pronounced slowdown, registering the smallest monthly increase since mid-2022 as airfares and hotel costs declined.

US stocks opened higher, Treasuries rallied and the dollar weakened.

The report suggests that inflation is cooling as a year’s worth of interest-rate increases and recent credit stress work their way through the economy. However, overall prices are still rising at a brisk pace and the job market remains robust.

The Fed will need to see more than one month of data to be confident that price pressures are on a sustained downward path, especially after officials hinted last week that they may be done hiking for now.

See also: US real estate investors are wiped out in bets fuelled by Wall Street loans

That said, Wednesday’s report will be one of several that factor into policymakers’ decision next month. They’ll also receive the CPI for May, as well as reports on the labor market and their preferred inflation measure, the personal consumption expenditures index. Additionally, officials are still monitoring the ongoing banking stress and to what extent that will further tighten credit conditions.

Several key elements of US inflation showed moderation in April, as prices for airfares, hotel stays and new cars declined. Appliances fell by the most on record.

Shelter costs, which are the biggest services component and make up about one-third of the overall CPI index, rose 0.4% last month, the smallest in over a year. Measures of rent advanced.

See also: Fed signals one rate cut this year, but keeps door open to two

Because of the way the housing metrics are calculated, there’s a significant lag between real-time price changes and the government statistics. Other metrics suggest these gauges will soon turn over, but economists are split on the exact timing.

Stripping out energy and housing, services prices were up 0.1% in April and 5.1% from a year ago, both the weakest since July, according to Bloomberg calculations. Policymakers have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, though they compute it based on a separate index.

The goods disinflation that was dragging down overall price pressures last year has been losing steam. Excluding food and energy, goods prices were up 0.6% in April, the most since June. Used-car prices — a key driver of slower price growth in recent months — rebounded to rise the most in nearly two years.

Energy prices climbed 0.6% in the month, driven by higher pump prices. While grocery costs fell for a second month, the price of dining out continued to rise. Baby food and formula prices rose the most on record.

While Fed officials agree that wage gains and price growth are related, they’re divided as to which drives the other. A separate report out Wednesday showed real average hourly earnings climbed 0.1% in April, and were down 0.5% from a year earlier.

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