Investor confidence grows that interest rate increases are bringing prices under control
US inflation was slightly weaker than forecast in April, bolstering hopes that the Federal Reserve’s interest rate increases are bringing price rises under control.
Consumer price inflation dipped to an annual rate of 4.9 per cent, its lowest level since April 2021. Economists had expected it to remain steady at 5 per cent.
“It’s a step in the right direction,” said Kevin Cummins, chief US economist at NatWest Markets. “Some of the doves on the [Fed’s policymaking] committee may feel emboldened by the fact you’re seeing evidence that the worst of it is past, but core inflation and core services are still rising at a pretty solid pace.”
Lower airline fares helped bring down the headline figure, although inflation remained strong in areas such as used-car prices and still has some way to go to meet the central bank’s 2 per cent target.
Core inflation, which strips out more volatile food and energy costs, has remained stubbornly high for the past few months. It dipped slightly in April to 5.5 per cent year on year, but has barely moved since the end of last year.
Growth in shelter costs moderated for a second consecutive month, which Cummins said was an encouraging sign that should help to bring down the year-on-year core inflation number in the coming months.
On a monthly basis, the headline CPI index rose 0.4 per cent, while the core number rose by the same amount.
The White House said in a statement on Wednesday that easing gas and food prices were providing “some welcome breathing room for families” at a time when the US economy and job market are strong.
The “single biggest threat” to the economy now is the US hurtling towards a default on its obligations, said Karine Jean-Pierre, press secretary.
The data spurred demand for bonds as investors grew more confident that the Fed would not need to make further rate rises. Yields on the two-year Treasury, which tracks rate expectations, fell 0.08 percentage points to 3.94 per cent. Bond yields fall when prices rise.
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The overall pace of price increases in the US has slowed substantially from the 40-year highs of last summer, leading Fed chair Jay Powell to declare last week that “we’re getting close or maybe even [finished]” with interest rate rises.
The central bank’s benchmark rate has risen from close to zero at the beginning of last year to a range of 5 per cent to 5.25 per cent.
The Fed has also warned the recent banking turmoil could result in a credit crunch that would slow the economy and have a similar effect to further rate tightening.
Investors have for some time bet that a pause of the Fed’s campaign to lower inflation would be swiftly followed by a string of rate cuts, despite caution from Fed officials.
Those bets ramped up on Wednesday, with futures markets now implying a 5 per cent chance that the Fed would lift rates in June, according to Bloomberg data, from 21 per cent before the data was released.
Investors are pricing in almost three quarter-point rate cuts by the end of the year, but some economists remain sceptical.
“CPI remains far too strong for the Fed to even consider reversing course and cutting interest rates. While core services inflation and rents are showing some signs of moderation, core goods inflation appears to be accelerating . . . we think a June hike is still quite possible if overall economic data remains too strong,” said Gennadiy Goldberg, interest rate strategist at TD Securities.
Jobs figures released last Friday showed the labour market, a key driver of inflation, remained hotter than expected, while an alternative measure of core inflation also came in stronger than forecasts late last month. Powell last week signalled it would not be appropriate to cut rates if price rises were slow to recede.
“You see signs of progress which is good, but if you combine this with labour market reports . . . we believe [the] Fed still has more work to do,” said Andrew Patterson, senior international economist at Vanguard.
Additional reporting by Kate Duguid in New York and Colby Smith in Washington
Copyright The Financial Times Limited 2023
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