Annual inflation in the US is slowing to below 5%, price pressures remain strong

WASHINGTON, May 10 (Reuters) – The annual rise in U.S. consumer prices slowed to below 5% in April for the first time in two years, while a key inflation target monitored by the Federal Reserve eased, potentially providing cover for the central bank to hold off on further rate hikes next month.

Still, inflation remains too strong, with the Labor Department report on Wednesday showing monthly consumer prices rising solidly due to sticky rental prices, as well as setbacks in the cost of gasoline and used motor vehicles. The mixed report dashed financial market hopes that the Fed would begin cutting interest rates this year to bolster the economy.

“Today’s consumer inflation report supports the case for the Fed to seriously consider a pause in rate hikes in June, but does not support any near-term rate cuts,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

The consumer price index (CPI) rose 0.4% last month after rising 0.1% in March. The increase was in line with economists’ expectations. Stubbornly high rents accounted for much of the increase in inflation.

However, there were pockets of relief for consumers. Food prices were unchanged for the second month in a row. Grocery store prices fell 0.2% after a 0.3% decline in March, posting back-to-back declines for the first time since July 2019. Fruit and vegetables, meat, fish and eggs were cheaper compared to March. Milk prices fell 2.0%, the most since February 2015.

Natural gas prices fell 4.9% and electricity costs fell for a second straight month, dampening some of the 3.0% jump in gasoline prices, which followed a 4.6% drop in March.

The rise came after Saudi Arabia and other OPEC+ oil producers announced further oil production cuts. But oil prices have since been mostly lower, pushing gasoline costs down as the risk of a recession has risen, due to the Fed’s punitive rate hikes, tightening credit conditions and an impasse over raising the federal government’s borrowing ceiling.

In the 12 months to April, the CPI increased 4.9%. It was the smallest year-on-year increase since April 2021 and followed a 5.0% advance in March.

The annual CPI peaked at 9.1% last June, the biggest increase since November 1981, and is slowing as last year’s first rise in energy prices after Russia’s invasion of Ukraine falls out of the calculation.

“On balance, inflation is still too high and it’s not going to fall back to 2% if it’s up 0.4% a month,” said Chris Low, chief economist at FHN Financial in New York. “We need to see steady increases around 0.15% to get there.”

Stocks on Wall Street rose amid relief that inflation readings did not exceed expectations. The dollar fell against a basket of currencies. Prices of US government bonds rose.

SERVICES INFLATION COOLING

The inflation data followed last Friday’s employment report, which showed an acceleration in job and wage growth in April, as well as the unemployment rate falling back to a 53-year low of 3.4%. It is one of two inflation reports that Fed officials will have in hand at their policy meeting on 13-14. June.

The US central bank raised its overnight benchmark interest rate by another 25 basis points to a range of 5.00%-5.25% last week, signaling it may pause its fastest monetary tightening campaign since the 1980s, although it maintained a hawkish bias . The Fed has raised the policy rate by 500 basis points since March 2022.

Excluding the volatile food and energy components, CPI rose 0.4% last month, matching March’s gain. In the 12 months to April, the so-called core CPI rose 5.5% after rising 5.6% in March.

The monthly core CPI was lifted by the prices of used cars and trucks, which rose 4.4%, the first increase since June last year. This boosted core commodity prices by 0.6%, the most since mid-2022, after rising 0.2% in March.

Owners’ Equivalent Rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, rose 0.5% for the second straight month. Although rental prices continued to put upward pressure on the core CPI, rental inflation is poised to moderate.

The government reported last week that the rental vacancy rate rose to a two-year high in the first quarter. Independent targets have also shown that rental prices have a downward trend, and the rent targets in the CPI tend to lag behind the independent targets.

As airfares fell 2.6% and hotel and motel rooms fell 3.0%, prices for services rose 0.2% after rising 0.3% in March. Services excluding shelter rose 0.1% after being unchanged last month. But the cost of recreation and personal services increased.

According to economists’ calculations, prices of core non-residential services rose 0.1% after climbing 0.4% in March. It was the smallest gain in the so-called supercore since July 2020. Supercore prices are monitored by policymakers to measure their progress in taming inflation.

However, some economists cautioned against placing too much weight on the monthly super core measure using CPI data. They said policymakers were more focused on the super-core measure in the personal consumption expenditures (PCE) price index data, which was considered less volatile.

The CPI and PCE price indices are calculated using different methods and weights.

“When Fed officials refer to this calculation, they mean the PCE version not the CPIs,” said Oscar Munoz, macro strategist at TD Securities in New York. “Our expectation is that this segment will gradually lose momentum as labor market conditions become less tight as the year progresses. A June increase remains on the table.”

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama

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