April Inflation Report Recap: Prices Cool Slightly, Relief For Fed As Inflation Battle Is Working

Key takeaways

• CPI data for April showed a 4.9% price increase year-on-year, down from March’s figure and the 10th inflation slowdown in a row
• Stocks were mostly up, Treasury yields declined and gold ended flat at the news
• The future is still uncertain regarding the Fed interest rate increase, but a potential pause in June just became more likely with the news

As the Fed’s battle against inflation rages on, all eyes have been on the key inflation data in recent months. The consumer prices index (CPI) report was released yesterday, confirming a 10th straight decline in inflation since the peak of June 2022.

It’s overall good news for the economy and the Fed, but there’s still a long road ahead before we call victory over inflation. We’ve got the details on the CPI report, what it means and whether more interest rate rises could happen.

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What’s the latest inflation data?

The April CPI report reflected a 4.9% annual price increase, a small retreat from March’s 5% figure – but a retreat nonetheless, which is good news given gas price jumps in the last few weeks had some worried inflation could have accelerated.

On that note, headline prices did accelerate slightly due to the spike in gas – they climbed 0.4% compared to 0.1% in March – but given the gas price increase has already faded away, this isn’t expected to be an issue by the time May’s figures are released.

Core CPI, which strips out the volatile food and energy prices, came in at 5.5%. This again was slightly lower than March’s 5.6% result. April’s stats are the 10th decline in the annual inflation pace since it hit 9.1% back in the summer of 2022.

But it wasn’t all roses. There was an acceleration in used car prices, rising 4.4% after declining for nine months in a row. One economist pointed out that core inflation would only have risen by 0.2% without used cars, but prices are anticipated to retreat again.

What does this all mean? Well, it’s largely good news for the Fed, which has raised interest rates to their highest since the 2008 financial crisis. But it’s further proof this inflation battle isn’t going away quickly.

Is there other economic data available?

The producer prices index (PPI) report figures released today showed an increase of 2.3% year-on-year, a 0.2% increase which comes in below the 0.3% predicted figure. It’s the 10th consecutive decline and the lowest point since January 2021. The peak PPI rate was 11.7% in March 2022.

The number of Americans filing for unemployment also rose, with jobless claims rising to 264,000 for the week ending May 6 – an increase of 22,000. It’s a higher figure than analysts expected and the highest unemployment level since November 2021. Given unemployment rates have been so low, it’s a sign the jobs market is cooling down and more good news for traders who want to see interest rate cuts this year.

How did the market react?

Most of the market finished the trading day on a positive note. The S&P 500 rose 0.4%, but the Dow Jones Industrial Average closed 0.1% down. Tech companies, which rely more than other sectors on low-interest rates and inflation, made the most gains. The Nasdaq Composite was up 1% at the inflation news; Apple was up 1%, Microsoft saw a 1.7% gain and Amazon rose 3.3%.

As for bonds, the ten-year Treasury yield retreated to 3.438% from 3.520% as bond prices rose. The two-year Treasury yield declined from 4.022% to 3.899%. The decline in yields led gold prices to rally 0.85% on Wednesday before losing the gain, now hovering at the $2,023 mark.

Could the Fed raise interest rates again?

New York Fed president, John Williams, had warned the Fed would take whatever action was needed earlier this week to fight sticky inflation—even if that meant raising interest rates even higher. “We haven’t said we are done raising rates,” were the official words.

That being said, the picture is slowly looking more positive for the U.S. economy. With inflation gradually easing and the red-hot jobs market slowly cooling off, it’s further backing for the Fed to pause interest rates in June rather than raise them again. The CME FedWatch tool now shows a 93.9% chance of interest rates pausing next month.

As for rate cuts by the end of the year, the Fed and Wall Street have two different views. While Fed chair Jerome Powell has said it’s highly unlikely there will be any interest rate cuts this year, futures traders raised their predictions to a 34.5% possibility of the Fed making a quarter-point interest rate cut in July.

Is it wishful thinking from the futures market? Possibly. The problem is that the economy is still on shaky ground. First Republic’s collapse a month after the March banking crisis set other regional bank stocks plunging, with PacWest in the firing line. The stock price jumped over 9% at the inflation data news, but we’ve got a long road ahead until the banks can breathe a sigh of relief.

There’s also the not-so-small matter of the U.S. Government’s debt-ceiling crisis, which is rapidly coming down to the wire. The U.S. could default on its debt by as soon as June 1st – before this was a truly unthinkable situation, but as the deadline draws closer with no negotiation results in sight, the markets are hurting.

The bottom line

The report was the first time that inflation has fallen under 5% in two years. That’s a silver lining against a background of mass layoffs, recession chatter and interest rate increases making borrowing more expensive.

But the Fed will be the last place to call the battle won. There are too many variables, like the jobs market and banking sector’s health, to contend with, but the inflation report has made a June rate hike pause that much more likely.

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