April’s Inflation Comes In Lowest in Two Years

Investors were closely watching the April inflation report as a significant deviation from forecasts would have made investors question whether the Federal Reserve would continue to keep interest rates unchanged at its next meeting or potentially raise them further.

The April CPI report met forecasts as inflation rose 0.4% in April and by 4.9% year-over-year. The year-over-year rise was the smallest annual increase since the period ending April 2021. The April CPI data was a sharp rise from the increase of 0.1% month-over-month in March, which was the smallest increase in two years. The core CPI, which excludes fuel and food prices, also rose by 0.4% in April, slightly higher than estimates of 0.3% and the same as in March, or 5.5% year over year. 

Higher home prices were the largest contributor to the monthly all-items index, followed by increases in the prices of used cars and trucks and the index for gasoline.

After the Fed’s recent meeting and Jerome Powell’s news conference last week, stock-market investors appear to be confident that the 25-basis-point rate hike could be the last one of the Fed’s monetary tightening policy. Powell had stated at the news conference that the Fed’s inflation target of 2% still  “has a long way to go,” and future data will determine whether more interest rate hikes were needed.

According to the CME FedWatch tool, traders have already priced in an 83.4% probability that the Fed is likely to keep interest rates unchanged at its June meeting and also factored in the possibility of rate cuts by year-end.

Citigroup economist Veronica Clark is anticipating higher-than-expected inflation and stated in a note to clients, “Higher-than-expected inflation is the key factor leading us to still pencil in higher nominal policy rates this year, with our base case remaining for further rate hikes in both June and July.”