US inflation eases to 4.9% in April as Fed tightening takes effect

Inflation in the United States was slightly weaker than expected in April, boosting hopes that increases in interest rates by the Federal Reserve will bring rising prices in check.

Consumer price inflation fell to an annual rate of 4.9 percent, the lowest level since April 2021. Economists had expected it to hold steady at 5 percent.

“It’s a step in the right direction,” said Kevin Cummins, chief US economist at NatWest Markets. “Some of the doves on the (Fed’s policy-making) committee may be heartened by the fact that you’re seeing evidence that the worst is over, but core inflation and core services are still rising at a very strong pace.”

Lower airline prices helped lower the headline figure, although inflation remained strong in areas such as used car prices and it still has a long way to go to meet the central bank’s 2 percent target.

Core inflation, which precludes more volatile food and energy prices, has remained stubbornly high over the past few months. It fell slightly in April to 5.5 percent year on year, but has barely moved since the end of last year.

Growth in shelter costs slowed for the second month in a row, which Cummins said is an encouraging sign that should help lower the year-over-year core inflation number in the coming months.

On a monthly basis, the core CPI increased by 0.4 percent, while the core figure rose by the same amount.

The White House said in a statement on Wednesday that easing gas and food prices provides “some welcome relief for families” at a time when the US economy and labor market are strong.

Karen Jean-Pierre, the press secretary, said the “single biggest threat” to the economy now is a rush by the US to default on its commitments.

The data stimulated demand for bonds as investors grew more confident that the Fed would not need to raise interest rates again. The yield on two-year Treasury notes, which measures interest rate expectations, fell 0.08 percentage point to 3.94 percent. Bond yields fall when prices rise.

The overall pace of price rises in the US has slowed significantly from 40-year highs last summer, prompting Federal Reserve Chairman Jay Powell to declare last week that we are “near or may (maybe) done” with rate hikes.

The central bank’s benchmark interest rate has risen from nearly zero at the start of last year to a range of 5 per cent to 5.25 per cent.

The Fed also warned that the recent banking turmoil could lead to a credit crunch that would slow the economy and have a similar effect to further tightening of interest rates.

Investors have been betting for some time that a pause in the Fed’s inflation-lowering campaign would be quickly followed by a series of interest rate cuts, despite caution from Fed officials.

Those bets increased on Wednesday, with futures markets now indicating a 5 percent chance that the Fed will raise interest rates in June, according to Bloomberg data, from 21 percent before the data was released.

Investors are pricing in roughly three-quarters of a rate cut point by the end of the year, but some economists remain skeptical.

“CPI remains too strong for the Fed to consider reversing course and lower interest rates. While inflation for basic services and rents is showing some signs of moderation, commodity inflation appears to be accelerating… said Gennady Goldberg, interest rate analyst at TD Securities. We believe a rally in June is still quite possible if general economic data remains very strong.

Jobs numbers released last Friday showed that the labor market, the main driver of inflation, remained higher than expected, while a proxy measure of core inflation came in stronger than expected late last month. Powell indicated last week that it would not be appropriate to cut interest rates if the rate hike is slow to abate.

“You see signs of progress which is good, but if you combine this with labor market reports . . . we think the Fed still has more work to do,” said Andrew Patterson, chief international economist at Vanguard.

Additional reporting by Kate Duguid in New York and Colby Smith in Washington