US inflation drops to 4.9% in April with Fed tightening – 05/10/2023 – Market

US inflation in April was slightly weaker than anticipated, bolstering hopes that the Federal Reserve’s interest rate hikes are keeping prices in check.

Consumer price inflation fell to an annual rate of 4.9%, its lowest level since April 2021. Economists had expected it to remain flat at 5%.

“It’s a step in the right direction,” said Kevin Cummins, chief US economist at NatWest Markets. “Some of the committee’s ‘doves’ [de formulação de políticas do Fed] may be encouraged by the fact that we are seeing evidence that the worst is over, but core inflation and basic services are still rising at a pretty solid pace.”

Lower airfares have helped bring the number down, although inflation has remained strong in areas such as used car prices and still has a long way to go to reach the central bank’s 2% target.

Core inflation, which excludes the more volatile costs of food and energy, has remained stubbornly high in recent months. It fell slightly in April to 5.5% year-on-year, but has hardly moved since the end of last year.

Housing cost growth moderated for the second consecutive month, which Cummins said was an encouraging sign that should help bring the year-on-year inflation figure down in the coming months.

On a monthly basis, the consumer price index (CPI) was up 0.4%, while the headline figure was up by the same amount.

The White House said in a statement Wednesday that lower gas and food prices are providing “families a welcome breathing space” at a time when the US economy and job market are strong.

The “biggest threat” to the economy now is that the US is heading towards a default on its obligations, said Karine Jean-Pierre, press secretary.

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

The overall pace of US price increases has slowed substantially from last summer’s 40-year highs, prompting Fed Chair Jay Powell to declare last week that “we are getting close or maybe even [acabando]” with increases in interest rates.

The central bank’s benchmark rate rose from near zero at the start of last year to a range of 5% to 5.25%.

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

Investors have for some time been betting that a lull in the Fed’s campaign to curb inflation would be quickly followed by a series of rate cuts, despite the caution of Fed officials.

Those bets increased on Wednesday, with futures markets now suggesting a 5% probability that the Fed will raise rates in June, according to Bloomberg data, from 21% before the data release.

Investors are pricing in rate cuts of nearly 75 points through the end of the year, but some economists remain skeptical.

“The CPI remains too strong for the Fed to consider reversing course and cutting interest rates. While utility and rent inflation is showing some signs of moderating, basic goods inflation appears to be accelerating (…) we believe that a June rally is still possible if the overall economic data remains very strong,” said Gennadiy Goldberg, interest rate strategist at TD Securities.

Employment numbers released last Friday (5th) showed that the labor market, one of the main drivers of inflation, remained warmer than expected, while an alternative measure of core inflation also came in stronger than expected. forecasts at the end of last month. Powell signaled last week that it would not be appropriate to cut rates if price increases are slow to ease.

“You see signs of progress, which is good, but if you combine that with labor market reports… [o] Fed still has more work to do,” said Andrew Patterson, senior international economist at Vanguard.