Inflation fell a tenth of a percentage point to 3.4% for the year ending in April, the Bureau of Labor Statistics reported on Wednesday in an update to the consumer price index.
The decline in inflation is a welcome development for the Federal Reserve as it considers when it will begin cutting interest rates. It is also helpful for President Joe Biden. The White House has been emphasizing any positive inflation data alongside the country’s robust labor market as “Bidenomics” in action.
On a month-to-month basis, inflation rose 0.3%.
“Core inflation,” which doesn’t include volatile food and energy prices, fell two-tenths of a percentage point to 3.6% for the year ending in April. Overall, core inflation has generally trended down over the past 12 months in a sign that the Fed’s tightening is starting to pay off.
Dan North, a senior economist with Allianz Trade Americas, told the Washington Examiner that while the report is welcome, inflation has more cooling to do before the Fed can start eyeing interest rate cuts.
“For the first time in a few months, it looks like we’re pretty much on expectations, which is great, didn’t get a hot number,” North said. “But if you still look at year-over-year on the headline, we’re not moving anywhere yet. This will be the 11th month in a row that it has been between 3% and 3.7%. If you look at the chart, it’s just trading in a range.”
Both housing costs and some energy costs pushed the CPI higher last month. Shelter costs rose 0.4% over the month and 5.5% over the year. Shelter and gasoline prices contributed to a whopping 70% of the monthly increase in overall inflation.
The energy index rose 1.1% over the month as most of its component indexes increased. Energy prices are now up more than 2.6% from this time last year.
Also this week, inflation as measured by the producer price index rose to 2.2% for the year ending in April, the Bureau of Economic Analysis reported. On a month-to-month basis, the price index increased by 0.5%, more than expected.
Annual inflation in the CPI peaked at about 9% in June 2022, and while it is now much lower than it was, price growth is still running uncomfortably higher than the Fed’s preferred 2% level.
Inflation has been blamed on various factors on both the supply and demand sides of the equation. Republicans have argued that the explosion of stimulus spending during the pandemic and ultralow interest rates supercharged price growth. Democrats have been pointing to supply-side problems and noted that inflation increased in most Western countries and not just the United States.
Biden has become a major target of voters’ ire over the higher prices. Biden’s economic approval rating is underwater, hamstringing him in his contest with former President Donald Trump, who is the expected Republican nominee.
Consumer sentiment has also recently dipped amid several hotter-than-anticipated inflation reports.
An April Bloomberg News-Morning Consult poll found that a mere 18% of registered voters predict that inflation will improve by the end of the year, while 75% said they think it would either stay the same or get worse. Additionally, 70% said the overall economy is going on the wrong track.
Inflation and higher interest rates are overshadowing some positives in the economy. In many ways, the economy is not sputtering and has remained relatively robust. GDP growth, a broad measure of the country’s economy, has been positive, while the unemployment rate remains at low levels, historically speaking.
But there have been some signs the labor market is starting to weaken.
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The economy added 175,000 jobs in April versus 315,000 the month before, and the unemployment rate rose a tenth of a percentage point to 3.9%. Also, the number of new applications for unemployment benefits rose by 22,000 to 231,000, according to the most recent data — that marks the highest number of jobless claims in about nine months.
While the timing of a Fed rate cut is still quite uncertain, two factors could speed the timeline up. First, if inflation begins to fall back to that 2% goal, the Fed could hike sooner rather than later. Second, signs of a major slowdown in the labor market could lead Fed officials to cut rates out of fear of a recession.
