Inflation Cooled Slightly, Offering Some Relief for Consumers and the Fed (2024)

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What to know about the inflation report.

The slowdown will likely come as welcome news to consumers, and as a relief to policymakers at the Federal Reserve, who have been concerned that they were losing ground in their fight against inflation. But economists cautioned that one month of encouraging data was far from enough to set those worries to rest.

“I would characterize it as a small step in the right direction,” said Stephen Stanley, chief U.S. economist at Santander.

Both overall and core prices rose 0.3 percent from the previous month, down from 0.4 percent in February and March.

Inflation fell rapidly last year, giving rise to hopes that the Fed was on the verge of succeeding in its effort to rein in price increases without causing a recession, and that the central bank could soon begin cutting interest rates. But progress has since stalled, and investors have all but given up hope of rate cuts before September.

The encouraging inflation report on Wednesday is unlikely to change those expectations. But it could be a step toward giving policymakers confidence that inflation is returning to normal, which they have said they need before they begin cutting rates, which are currently set at about 5.3 percent.

“I think there will be something of a sigh of relief from the Fed, but at the same time there’s still work to be done,” said Sarah House, senior economist at Wells Fargo. She noted that services prices, in particular, continued to rise quickly in April, albeit more slowly than they had in recent months.

The report is also likely to be met with relief at the White House after what has been a rough recent run of inflation data for President Biden. Grocery prices fell outright in April, and are up just 1.1 percent over the past year, encouraging signs of progress in what has been one of the most painful categories of inflation for families.

But the report also provided fodder for Republicans. Gasoline prices rose a seasonally adjusted 2.8 percent in April from March.

Still, while Wednesday’s report contained some mixed signals, it did at least stop the bleeding after several months of bad news.

Had the data come in hotter than anticipated yet again, it could have led policymakers to conclude that high rates needed more time to bring inflation to heel. Speaking at an event in Amsterdam on Tuesday, Jerome H. Powell, the Fed chair, reiterated that recent inflation readings had made him more cautious about cutting rates.

“We did not expect this to be a smooth road, but these were higher than I think anybody expected,” he said. “What that has told us is that we will need to be patient and let restrictive policy do its work.”

Any further delay would be bad news for investors, who have been eagerly anticipating lower rates, and for low- and moderate-income Americans, who are increasingly struggling to manage the burden of higher borrowing costs. Data from the Federal Reserve Bank of New York on Tuesday showed that a rising share of borrowers are falling behind on their credit card bills as rates on those debts have skyrocketed.

Wednesday’s report showed improvement in some of the categories that had driven the recent uptick in inflation. Health insurance costs, which jumped in March, rose more slowly in April. Car insurance rates, too, rose more slowly, although still at an uncomfortably rapid clip.

But prices in one key part of the economy remained stubborn: housing. For more than a year, forecasters have been predicting that the government’s measure of housing inflation would ease, citing private-sector data showing rent increases slowing.

Instead, housing costs in the Consumer Price Index have continued to rise more quickly than before the pandemic, a pattern that continued in April.

“The initial reaction from the market to this data is that this is a relief, and it’s good news, because we’re not re-accelerating,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “But when I look at the details, it seems to suggest a degree of stickiness in inflation,” in part because of housing.

Still, the latest data could restore some confidence that policymakers will be able to keep bringing down inflation without causing a recession. The Fed had seemed on track to do that last year, defying predictions that high interest rates would inevitably cause a large increase in unemployment.

But as the fight has dragged on, some economists have become more concerned that the Fed will prove unable to control inflation fully without slowing the economy so much that people lose their jobs. Job growth slowed more than expected in April, and the unemployment rate has gradually crept up.

“The labor market has held up so well,” Ms. House said. “But the longer we keep interest rates where they are, the more I get worried about the labor market side.”

Jeanna Smialek and Jim Tankersley contributed reporting.

Biden has been trying for months to find the right balance between claiming credit for economic gains and expressing solidarity with voters struggling with high prices. Here, he’s leaning into the “feel your pain” side of the equation.

Former President Donald J. Trump’s campaign is, not surprisingly, hitting Biden on today’s report. “Joe Biden’s poll numbers continue to sink as prices for the American people continue to rise,” Karoline Leavitt, the campaign press secretary, said in a statement.

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Food price gains moderated in April.

Compared to a year earlier, food inflation climbed 2.2 percent in April, the same rate it rose in March. Still, that is a faster rate than prices were rising before the pandemic.

Prices for fruits and vegetables declined 0.8 percent over the month after increasing 0.1 percent in March. Meats, poultry and fish prices fell 0.1 percent, down from an increase of 0.6 percent the month before. Some products saw more rapid price gains. Costs for cereal and cereal products increased 2.2 percent over the month, and prices for ice cream and related products rose 3.3 percent in April.

Egg prices declined 7.3 percent over the month. That was a reversal from the two months prior, when they rose 4.6 percent in March and 5.8 percent in February. Economists have mostly attributed the recent rise in egg prices to bird flu outbreaks hitting commercial farms.

Although egg prices declined in April, David Ortega, a food economist at Michigan State University, said there was still a lot of uncertainty surrounding bird flu outbreaks, and he expected prices to rise in the coming months if outbreaks continue to worsen.

Overall food inflation has cooled over the past several months as transportation and raw material costs have moderated. Economists have said they expect overall food inflation to continue easing in the coming months.

Still, the high cost of food has posed a political problem for President Biden ahead of the election. Although food prices have been rising at a slower rate in recent months, economists have said consumers might not be taking much comfort with that fact because prices are still significantly higher than they were a few years ago.

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“I don’t think there is any benefit right now to signaling too strongly in either direction for the Fed,” she said.

“This is the first good C.P.I. report in four months and the market likes it,” said Gary Pzegeo, head of fixed income at CIBC Private Wealth US.

Paul Ashworth, chief North America economist for Capital Economics, said, “all things considered, this is consistent with the Fed cutting interest rates in September,” in a note he wrote to clients.

One reason why: According to a report out today from Child Care Aware of America, the supply of new daycares hasn’t kept up with demand as parents go back to work in person.

I would expect Biden and his team to highlight falling grocery prices — progress on an issue that consumers are paying an enormous amount of attention to.

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Housing inflation held steady in April, as a more marked slowdown remains elusive.

Forecasters have been looking for a slowdown because market-based rents on new leases have cooled notably, and economists have expected that to slowly feed into official inflation data. But the government’s inflation figures capture more than just new rents: They try to represent what is happening to all rental units, including those with existing leases, and also estimate how much it would cost to rent owner-occupied housing.

It is taking an unexpectedly long time for the slowdown in real-time rents to move into those measures, though it is slowly happening. The Bureau of Labor Statistics’ rent of primary residence index picked up 0.4 percent in April from the previous month, in line with its March gain. And a measure that tracks how much it would cost someone who owns their house or apartment to rent it climbed by 0.4 percent, also unchanged.

That pace of increase is slower than last year, but it is also a reminder that it is taking time to turn the tide on housing inflation.

Economists broadly still expect official housing inflation measures to moderate this year. Rent growth on existing leases must eventually slow down to look more like the rent growth on new leases, the logic goes, because otherwise people who are facing big rent jumps will simply move.

But there is uncertainty around both when that moderation will happen and how extensive it will be. And some economists have been eyeing a recent tick up in at least one measure of new leases — a nervousness that is likely to linger in light of the new data.

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The dollar is also sharply weaker, a welcome sign for many countries around the world.

Even though it’s slowing, the rise in car insurance is still staggering compared with other inflation components. Car insurance prices haves risen by 22.6 percent over the last year. Insurers have just recently gotten permission to adjust their prices to conditions that have since faded, and now they’re hoping to start turning a profit again.

The combined used and new vehicles index is now down about three percent from its peak in May of last year.

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Egg prices fell 7.3 percent in April, a reversal after prices rose 4.6 percent the month before.

A positive report could be enough to push the S&P 500 back up to another record high, after a brief blip in this year’s rally.

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The Fed chair’s confidence in cooling inflation is ‘not as high’ as before.

Central bankers have been clear that rate cuts this year are still possible, but they have also signaled that they are planning to leave interest rates on hold for now as they wait to make sure that inflation is genuinely coming under control.

Speaking during a panel discussion in Amsterdam, Mr. Powell said officials had been surprised by recent inflation readings.

“We did not expect this to be a smooth road, but these were higher than I think anybody expected,” Mr. Powell said on Tuesday of recent inflation readings. “What that has told us is that we will need to be patient and let restrictive policy do its work.”

Mr. Powell said that he expected continued growth and a strong labor market in the months ahead, and that he believed inflation would begin to slow again.

But, he said, “my confidence in that is not as high as it was, having seen these readings in the first three months of the year.”