Attention Fed Watchers: 4 Reasons Why April’s Inflation Report Could Be Good News

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Consumer prices rose 4.9 percent in April, which could be good news for investors worried about inflation and the Federal Reserve.

The reading was below 5.25 percent, the top of the central bank’s target range. This represents the first drop below the Fed funds rate since April 2015, when inflation was negative. It also happened in 2009 after the Great Financial Crisis.

The unusual flipping between inflation and interest rates may create the potential for a pause in rate hikes or even cuts later in the year. The news could also focus attention on the Summary of Economic Projections at the next meeting on June 14. (That’s the Fed document with estimates for key data points, including the famous “dot plot” for interest rates.)

There are at least three other reasons why Wednesday’s CPI report could be a big deal.

First, it was lower than the 5 percent average forecast by economists, the second straight month that prices rose less than expected.

Second, the increase was the smallest since April 2021, as the economy reopened and inflation surged higher. The number was also below the psychologically important 5 percent level.

Third, shelter costs slowed rapidly. Let’s explore this one a little more.

CME FedWatch tool showing estimated rates at the December 13 meeting. Notice that a drop of 50-75 basis points is priced in. Also notice the change in expectations after yesterday’s inflation report.

Shelter and CPI

Shelter costs rose 0.4 percent month-over-month in April. It was the smallest increase since the beginning of last year. The growth has also slowed sharply from 0.6 percent in March and 0.8 percent in February.

This could be good news for inflation because shelter accounts for one-third of the consumer price index.

Another reason is that private-sector data has shown steady declines in shelter costs. Rent.com’s online index of median apartment rents fell slightly on a yearly basis in March, the first drop since the pandemic hit in March 2020.

Some observers, including billionaire investor Barry Sternlicht and Wharton School Professor Jeremy Seigel, have noted this discrepancy. They say lagging government numbers have overstated inflation, which may lead to rate cuts later in the year.

On a related note, Moody’s warned on April 3 that rents were falling as vacancy rates increase.

Consumer price index (CPI), year-over-year change, courtesy of the St. Louis Federal Reserve.

Eggs and Oil

Two other trends could potentially help bring inflation lower.

First is the steady decline in food prices. “Food at home,” which includes groceries, fell 0.2 percent from March to April. Aside from the dramatic swings during the pandemic in 2020, grocery prices are now shrinking for the first time since the Great Financial Crisis.

Second is the steady decline in energy prices. TradeStation data shows crude-oil futures (@CL) are down more than 10 percent this year. Gasoline hasn’t dropped as much because of strong demand and tight supplies, but the slide in crude could keep a lid on prices overall.

In conclusion, April’s report shows more progress in the battle against inflation. Even if some Americans aren’t yet benefitting, financial markets may think the worst of the crisis has passed.

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