Macro

US Inflation Eases Slightly: CPI Up 0.4%, Core at 0.3%

April CPI expected to show slight easing with a 0.4% rise, as Fed adopts wait-and-see approach amid persistent housing cost pressures.

By Athena Xu

5/15, 00:45 EDT
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Key Takeaway

  • April's US inflation data expected to show moderation with core prices up 0.3% and overall CPI rising 0.4%, signaling a potential easing trend.
  • Rental inflation remains a significant factor keeping overall inflation high, with close monitoring of owners’ equivalent rent and primary residence rent.
  • Despite potential moderation in core CPI, factors like California's minimum wage increase may boost April's core PCE deflator, the Fed's preferred inflation gauge.

Inflation Moderation in Focus

April's Consumer Price Index (CPI) report is highly anticipated to reveal a slight moderation in inflationary pressures, with expectations set for a 0.4% monthly increase in the broader CPI and a 0.3% rise in core CPI, excluding food and energy. This potential easing comes after three consecutive months of higher-than-expected core CPI readings, sparking concerns over the prolonged battle against inflation. The Federal Reserve, having shifted to a more cautious stance, is closely monitoring these developments, with any indication of sustained inflationary moderation being key to future rate decisions. "The Fed has effectively moved to the sideline," notes Stephen Stanley, chief economist at Santander US Capital Markets, highlighting the central bank's wait-and-see approach pending clearer signs of inflation trends.

Housing and Rental Costs: A Persistent Challenge

Housing costs, particularly rents, remain a significant driver of the current inflationary environment, with the CPI's shelter component—encompassing owners' equivalent rent and rent of primary residence—playing a crucial role. Despite some leading indicators suggesting a moderation in rent increases, the pace of this moderation has been slower than anticipated, contributing to sustained overall inflation. The divergence in owners’ equivalent rent and rent of primary residence metrics raises questions about the trajectory of shelter inflation, which is a critical factor for the Fed's inflation outlook.

Impact of Wholesale Prices and Market Sentiment

The producer price index (PPI) for April showed a 0.5% increase, nearly double the expected rate, signaling continued inflationary pressures at the wholesale level. This uptick in PPI has tempered expectations for immediate Fed rate cuts, with financial markets now anticipating potentially only two rate adjustments later in the year. Despite this, stock markets have remained resilient, buoyed by strong corporate earnings and economic growth. The upcoming CPI report thus holds significant weight, as it could influence the Fed's policy direction and market expectations.

Trading Strategies and Market Reactions

Investors and traders are bracing for the CPI release, with various scenarios being considered for potential market reactions. A core CPI month-over-month change within the 0.3% to 0.35% range could be viewed positively by the markets, whereas a rise above 0.4% might trigger concerns over reaccelerating inflation and lead to a sell-off. The recent PPI data and its implications for future inflation and Fed policy add to the significance of the CPI report, making it a critical moment for market participants.

Street Views

  • Stephen Stanley, Santander US Capital Markets (Neutral on the inflation data):

    "The Fed has effectively moved to the sideline, postponing any thought of a rate cut until the inflation data show sustained improvement... I look for the April CPI to represent a small step in the right direction."

  • Andrew Schneider, BNP Paribas (Cautiously Optimistic on rental inflation):

    "Based on changes in market rents, home prices, and the BLS’s repeat and new tenant rent indexes, we think the next leg lower will occur in Q2. We pencil in combined rent and OER inflation at just over 0.40%... We think the biggest source of upside risks emanates from shelter inflation, specifically if our anticipated downturn comes later in the quarter than April."