Led by lower food and auto prices, inflation in the United States cooled slightly last month after three elevated readings, likely offering a tentative sigh of relief for officials at the Federal Reserve as well as President Joe Biden’s reelection team.
Consumer prices rose 0.3% from March to April, the Labor Department said today, down slightly from 0.4% the previous month. Measured year-over-year, inflation ticked down from 3.5% to 3.4%. And a gauge of underlying inflation, which excludes volatile food and energy costs, reached its lowest level in three years.
Inflation had been unexpectedly high in the first three months of this year after having steadily dropped in the second half of 2023. The elevated readings had dimmed hopes that the worst bout of inflation in four decades was being tamed and raised concerns that prices could spike again.
Whether inflation continues its decline could have a significant effect on the presidential race. Republican critics of Biden have sought to pin the blame for high prices on the president and to use it to try to derail his reelection bid. Though hiring remains robust and wage growth, on average, healthy, consumer prices remain generally well above their pre-pandemic levels.
Wednesday’s report provides a dose of reassurance that the pace of price increases may be resuming its slowdown. While the latest figures show inflation still well above the Fed’s 2% target, it’s the first time this year that the year-over-year figure has declined. And price increases cooled in some service industries, such as hotels, health care and auto repairs, that had previously kept inflation elevated.
The report “was a tiny step in the right direction,” said Danielle Hale, chief economist at Realtor.com. “The fight against inflation is not yet over, but the worsening trend observed in the first quarter of 2024 may have ended.”
Fed Chair Jerome Powell had responded to the high inflation readings earlier this year by dropping his previous suggestions that interest rate cuts were likely in 2024. Instead, he stressed that the Fed’s policymakers need “greater confidence” that inflation is falling to their 2% target before they would reduce borrowing rates from high levels.
Some economists suggest that if inflation — and the overall economy — continue to cool, the Fed could still cut rates twice this year, which would reduce costs for mortgages, auto loans and credit cards, among other forms of borrowing.
A separate report on retail sales, also released Wednesday, showed that Americans’ spending at stores and restaurants was unchanged in April after a healthy gain in March. A more restrained consumer could reassure the Fed that inflation will keep cooling.
Wednesday’s inflation data “keeps alive the prospect of the Fed cutting rates in September,” said Kathy Bostjancic, chief economist at Nationwide Financial. “The weak retail sales data also lends support to that.”
Wall Street traders appeared to agree, sending stock prices higher and bond yields lower in morning trading. The broad S&P 500 stock index rose roughly 0.5% to an intraday record high. The yield on the 10-year Treasury note declined, a sign that traders expect lower interest rates in the future. Mortgage rates, which tend to track the 10-year yield, may also move lower.
Among individual items in April, grocery prices slipped, providing a break to shoppers. Egg prices, which have been volatile after a bout of avian flu, fell 7.3%. New and used car prices also dropped. By contrast, prices for gas and clothing both jumped.
Excluding volatile food and energy costs, so-called core prices rose 0.3% from March to April after three straight months of 0.4% increases. Measured with a year earlier, core prices increased 3.6% in April, down from 3.8% in March. The Fed closely tracks core prices, which tend to provide a better read of where inflation is headed.
For consumers and businesses, a sustained period of lower inflation would provide some much-welcome stability.
Read the full Associated Press report here.
