US consumer inflation falls to 0.3% in April; retail sales unchanged
Lodging costs, including rents, rose 0.4% and increased by the same margin for the third month in a row. Gasoline prices rose 2.8%, following a 1.7% increase in March. Photo: Bloomberg
US consumer prices rose less than expected in April, indicating that inflation has resumed its downward trend at the start of the second quarter, boosting financial markets’ expectations for a rate cut in September.
Those expectations were further bolstered Wednesday by other data showing that retail sales were unexpectedly flat last month as inflation-weary consumers cut back on spending at online retailers and auto dealers.
The reports suggested that domestic demand was cooling, which is likely to be welcomed by US central bank officials as they try to engineer a “soft landing” for the economy.
“The economic data this morning is perfectly in favor of rate cuts, with retail sales unchanged and inflation cooling and decelerating from the worrying pace in the first quarter,” said Christopher Rupkey, chief economist at FWDBONDS.
“The country is not yet out of the woods due to the threat of inflation, but we may be starting to see the end of the forest.” The consumer price index rose 0.3% last month, after rising 0.4% in March and February, according to the Department of Labor’s Bureau of Labor Statistics (BLS). The higher cost of living looms large during the November 5 presidential election.
Lodging costs, including rents, rose 0.4% and increased by the same margin for the third month in a row. Gasoline prices rose 2.8%, following a 1.7% increase in March. These two categories contributed more than 70% to the monthly increase in the CPI. Food prices were unchanged after rising 0.1% in March.
Supermarket food prices fell by 0.2%, with eggs, meat, poultry and fish cheaper, as well as fruit and vegetables and non-alcoholic drinks. But grains and bakery products cost more, while prices for dairy and related products rose marginally.
In the 12 months to April, the CPI rose 3.4%, after rising 3.5% in March. Economists polled by Reuters had forecast the CPI to rise 0.4% on a monthly basis and 3.4% on an annual basis. Annual consumer price growth has fallen from a peak of 9.1% in June 2022, although progress has stalled.
Inflation accelerated in the first quarter on strong domestic demand, after declining for much of last year. Last month’s slowdown came as a relief after data on Tuesday showed a rise in producer prices in April.
Economists say inflation is caused by providers of services like car insurance, housing and health care having to make up for higher costs. They expect inflation pressures to ease this quarter and prices to gradually move toward the Fed’s 2% target as the labor market cools.
That sentiment is echoed by Fed Chairman Jerome Powell, who said Tuesday: “I expect inflation to return to decline… on a monthly basis to levels more similar to last year’s lower rates.”
Financial markets likely saw a rate cut of roughly 73% in September, compared to 69% before the data. U.S. Treasury bond prices rose while the dollar fell against a basket of currencies.
A handful of economists expect the Fed to begin its easing cycle in July, while another minority believe a rate cut could come in December, if at all.
At the beginning of this month, the central bank left its main daily interest rate unchanged at the current bandwidth of 5.25%-5.50%, where it has been since July. The Fed has raised its policy rate by 525 basis points since March 2022.
HIGHER RENTS REMAIN
Excluding volatile food and energy components, the CPI rose 0.3% in April, after rising 0.4% for three months in a row. The so-called core CPI was driven by continued higher rents, which rose by 0.4%.
Owners’ equivalent rent (OER), a measure of the amount homeowners would pay to rent or earn from renting out their property, also rose 0.4% after a similar increase in March and February. Car insurance costs rose 1.8%, following a 2.6% increase in March.
There were also increases in the prices of personal care, recreation and education. Healthcare costs increased by 0.4%, due to an increase in hospital services. But prices for used cars and trucks fell 1.4%. Household furnishings and operations, new vehicles and airfares also cost less.
In the 12 months to April, the core CPI rose 3.6%.
That was the smallest year-on-year gain since April 2021 and followed a 3.8% increase in March.
A separate report from the Commerce Department’s Census Bureau shows that retail sales were unchanged in April after rising 0.6% in March. Economists had forecast that retail sales, which consist mainly of goods and are not adjusted for inflation, would rise 0.4% in April. Sales increased by 3.0% year-on-year in April.
Consumers are focusing their spending on essentials and cutting back on luxuries amid higher prices. But sales held up as a strong labor market helped households navigate the high inflation environment.
A report from the Bank of America Institute last week showed that lower-income spending growth remained above that of higher-income households in April, but warned that “the apparent cooling in the labor market from here will require close monitoring are held”. The report also identified rising property insurance costs as a “significant headwind for consumers.”
Retail sales excluding cars, gasoline, building materials and food services fell 0.3% last month, after a downwardly revised 1.0% increase in March. It was previously reported that these so-called retail sales rose 1.1% in March. Core retail sales most closely resemble the consumer spending component of gross domestic product.
Consumer spending rose 2.5% year-on-year in the first quarter, contributing to the economy’s growth rate of 1.6%
First print: May 15, 2024 | 7:53 PM IST