April CPI: Inflation was moderate, but still elevated

Key takeaways

• Headline inflation came in at a still strong 4.9%, but that number shows continuing moderation from the blazing inflation of the summer of 2022.
• While this inflation print shows that the Federal Reserve’s mission to bring inflation to its 2% target isn’t over, it also underscores how the Fed now has some breathing room on future rate increases.
• The biggest driver of inflation in April was shelter costs, which are a lagging indicator. Although the real estate market remains tight, new supply and weakening demand may translate to lower prices towards the end of the year.

The Bureau of Labor Statistics (BLS) recently published its Consumer Price Index (CPI) data for April 2023. The biggest gainer since last month was the price of used vehicles, which increased by 4.4%. The largest 12-month increase was in the transportation services category, which includes airfares, car and truck rentals and automobile repairs. Even though the category gained 11% since April 2022 (unadjusted), it declined 0.2% in April 2023 after larger gains in February and March earlier this year.¹

These findings align with market projections. “In April, the Consumer Price Index (CPI) increased by 0.4 from the prior month, and 4.9% on a year-over-year basis. While inflation still remains well above the Fed’s 2% target, the reading fell in line with market expectations,” commented Ajene Oden, Global Investment Strategist for J.P. Morgan Wealth Management.

Because the CPI is a weighted index, the rise in prices for shelter – including both rents and homeowners’ rent equivalent – was the biggest driver of the monthly all-items increase, followed by increases in the index for used cars, trucks and gasoline.

However, our strategists believe there may be some kind of light at the end of the tunnel with inflation likely to fall further. Oden commented, “The trend of disinflation in 2023 is evidence the Fed’s restrictive policy stance is working. However, it remains to be seen whether or not inflation will return to the Fed’s target of 2% without a recession,”

CPI headline inflation rate

The headline rate, which includes volatile energy and food prices, continued to drop from its high of just over 9% in June of 2022. The latest inflation print shows that overall inflation has decreased 45% from its peak last summer. The largest year-over-year declines have been in the gasoline and fuel oil indexes, which have fallen 12.2% and 20.2%, respectively.

Food prices remained flat month-over-month. The price for food at home decreased slightly, even though this decline was offset by a small increase in food prices at restaurants. The price of eggs – which has suffered staggering price increases over the last eighteen months that have frustrated consumers – was down 1.5% month-over-month in April.

The headline rate of 4.9% showed continued moderation from the blazing increase in prices in 2022. However, this number also highlights how inflation may remain “sticky” since it fell from its peak, and it may take more months of higher interest rates and the risk of a recession to bring it down to the Fed’s 2% inflation target.

Inflation drivers in April

The gains in other areas of core inflation – particularly housing – have kept the headline rate relatively high. Rent and owners’ rent equivalent both rose by 0.5% month-over-month in April.² Given that these categories comprise more than a third of the relative importance weighting in the index, moderate increases in shelter will keep the entire index elevated despite drops in the volatile food and energy indexes.

But as the economists at the BLS note, shelter is both difficult to measure and is a lagging indicator.³ The rents used in the sample are continuing rents (i.e., rents whose contracts were set a year or more ago), and only a small number of rents make up new data points that could indicate falling demand. The White House Council of Economic Advisers argues that “market data suggest that in recent months, rental growth has declined. According to our estimates, it will take some time – perhaps until later this year – but eventually we hope to see these declines reflected in official inflation data.”⁴

Market reaction

Markets’ initial reaction to the news was positive, with major indexes up in pre-market trading. “April’s CPI print is still too hot, but the trend still appears to be one of disinflation over the next few months. Aside from the big upswing in used car prices, core goods prices were relatively flat,” remarked Oden.

What’s more, cooling services inflation rates may point to a less active Fed in the coming months. Oden noted, “Services inflation, less shelter prices, dropped from 6.1% year-over-year to 5.2% year-on-year. The Fed is well aware that shelter prices are going to take some time to come down, but policymakers are likely to be encouraged that services inflation ex shelter is finally starting to cool. This supports our view that the Fed is likely to remain on pause for some time.”