U.S. Consumer Price Index (April 2023)

Inflation remains stubbornly elevated, but April data shows encouraging signs 

• The Consumer Price Index (CPI) increased 0.4% month-on-month (m/m) in April, meeting the consensus forecast. The 12-month change slipped to 4.9% – down from 5.0% in March. 
• Energy prices rose 0.6% m/m as higher gasoline prices (+3.0 m/m) more than offset the pullback in energy service costs (-1.7% m/m). Food prices were again flat on the month, pushing the year-ago measure down to 7.7%.
• Core inflation (excludes food & energy) was up 0.4% m/m – meeting the consensus forecast. Compared to last April, core inflation remains elevated at 5.5% – only a tenth of percentage point below it's March reading.
• Price growth across services (+0.4% m/m) held steady in April. Shelter inflation cooled for the second straight month, rising by 0.4% m/m, with gains spread across rent of primary residence (+0.6% m/m) and owners' equivalent rent (+0.5% m/m).  Lodging away from home (-3.0% m/m) was lower on the month, ending what had been five consecutive months of gains.
  • Non-housing services were up 0.1% m/m, a meaningful deceleration from the 0.3%-0.4% month-on-month gains seen in each of the five prior months.
• Core goods prices rose by 0.6% m/m – an acceleration from March's 0.2% m/m gain. Most goods categories were higher on the month, with used vehicle prices rising by a noticeable 4.4% m/m – snapping what had been nine consecutive months of declines.     

Key Implications

• There were definitely some encouraging signs in this morning's CPI numbers. The continued deceleration in shelter costs suggests that we are starting to see some passthrough from last year's pullback in rental rates, which should continue for the next several months. Meanwhile, price growth across non-housing services decelerated to its slowest month-on-month pace of growth in nearly two years. 
• That said, we need to balance this morning's good news with the fact that goods prices have accelerated for a second consecutive month and have (again) become a source of inflationary pressure. And while the slowing in shelter costs is encouraging, more recent market-based measures of rent have shown that average rental costs have again turned higher and are already back to last year's highs. This suggests the disinflationary pressure from shelter could be fleeting. 
• At the May interest rate announcement, the Fed signaled that they were nearing the end of its tightening cycle, but left the door open to further rate increases should the economic data continue to surprise to the upside. At this point, it's still too early to say if another hike is in the cards, particularly given the uncertainties surrounding the recent tightening in lending standards and the potential knock-on effects it may have on the real economy. But one thing is for certain. Current market pricing, which shows rate cuts beginning as early as September, appear out of step with the recent flow of economic data. Any outward push on rate cut pricing should help to pressure yields higher, effectively doing some of the heavy lifting for the Fed. 

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