April inflation: Good news under the surface

What happened?

April CPI inflation data came in right in line with expectations. Core CPI rose 0.4% month-over-month (MoM) and 5.5% year-over-year (YoY). That matches last month’s MoM figure and is a slight improvement on the YoY mark.

Digging in

After many months over the past year where the data under the surface was less encouraging than the headline figures, this latest data is more reassuring. For a second consecutive month, shelter-related inflation moderated—we expected that due to an anticipated 12- to 15-month lag from last year’s peak in house prices and expect that downward trend in shelter inflation to continue. That gives us increased confidence in falling inflation in the coming months. That also suggests the Fed will stay on hold with rates at current levels unless something big changes.

Outside of shelter, where inflation rates are now declining (but still quite elevated), the data in non-shelter services is even better. That has decelerated significantly recently and is currently at its slowest run-rate in over a year. Goods prices did reaccelerate this month, but we are not extrapolating from that as most of that increase appears to come from a 4.4% inflation rate in used car prices. In general, this data is quite encouraging for the inflation outlook.

No evidence for cuts

Barring a banking crisis or sharp weakening in the economy, we believe the market’s current expectations of interest rate cuts in the coming months are wrong. April’s inflation print shows inflation has fallen quite a bit, but it still has quite a way to fall before the Fed will likely be comfortable cutting rates. Inflation is still annualizing at over twice the Fed’s target rate if we look at trailing 3- or 6-month periods. In order to achieve a soft landing, they could conceivably cut mildly at some point in the future, but we’d need to see the level of inflation lower than it currently is and its rate of decline would have to be larger.