Inflation Eased in April but Remains Stubbornly High

Date: Thursday, May 11, 2023
Source: Wall Street Journal

Inflation edged slightly lower in April, likely keeping the Federal Reserve on course to pause interest-rate increases at its next meeting.

The consumer-price index rose 4.9% in April from a year earlier, the Labor Department said Wednesday, down from March’s 5% increase. The inflation reading has declined from a recent peak of 9.1% in June 2022, but remains historically high.

On a monthly basis, consumer prices rose a seasonally adjusted 0.4% in April, versus a 0.1% gain in March. April’s increase was driven by housing costs, which economists expect to cool in the coming months. Gasoline and used-car prices also rose last month.

Wednesday’s report makes it easier for the Fed to pause rate increases because it showed price pressures aren’t worsening and might soon be slowing. The Fed has aggressively raised rates for more than a year to try to tame inflation by slowing economic activity. The central bank is looking to see signs of inflation declining toward its 2% target.

Stocks were mixed Wednesday. The Dow industrials edged lower, while the tech-heavy Nasdaq rose 1% and the S&P 500 was up 0.45%. Bond yields moved lower. The 10-year Treasury note fell to 3.438%, from 3.520% Tuesday.

Fed officials have also shifted their focus away from lagging indicators of economic activity to assess the impact of recent bank failures on lending conditions and economic activity, which won’t immediately show up in broad measures of hiring and inflation.

Fed officials, at their meeting last week, approved raising their benchmark federal-funds rate to a range between 5% and 5.25%, the highest level in 16 years. Some of them discussed then whether they might be done raising rates, said Fed Chair Jerome Powell at a news conference on May 3. “We feel like we’re getting closer or maybe even there,” he said.

Until now, officials have been looking for clear signs of a slowdown to justify ending rate increases. But Mr. Powell indicated that calculation could shift now, and officials would need to see signs of stronger-than-expected growth, hiring and inflation to continue raising rates. The Fed slows the economy through lifting rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices and a stronger dollar.

While the report contains some positive signs for a continued slowdown in price gains, “it does suggest a risk that rates will need to remain high for a little longer than we have assumed,” said Andrew Hunter, an economist at Capital Economics.

On Wednesday, investors saw a 14% chance that the Fed would raise rates at its next meeting, according to CME Group.

Wednesday’s report showed that so-called core prices, which exclude volatile food and energy items, rose 5.5% from a year earlier, a slightly slower increase than in March. Economists see core prices as a better predictor of future inflation.

Core prices remain elevated due to persistently strong shelter costs. Housing price changes can take time to show up in inflation data due to the lag in mortgage and rental contracts.

Excluding shelter along with food and energy, prices rose 3.7% in April from a year earlier.

In April, used vehicle prices surged by 4.4% over the month due to a lack of inventory, while new car prices declined modestly. Gasoline prices rose in April, but have more recently moderated.

Some Americans are making adjustments as prices rise.

Ryan Flick, 39 years old, said he used to eat fast food a couple of times a week. “It never really felt like it was making a dent whatsoever in my budget,” he said.

But as prices for meals he favored rose to over $10 from $5 to $8 he was paying a few years ago, he made a choice to cut back. He said he would rather forgo a few forgettable weekday lunches and save money by making a sandwich at home, especially since he works remotely more often than in the past.

“If you’re going to eat out, you might as well take three times where you might have gotten fast food and go out for something nicer,” said Mr. Flick, a Denver resident who works in tech sales. Food prices have remained flat over the past two months, though a decline in grocery prices in April was offset by a rise in prices for dining out.

That divergence could provide relief to household budgets by giving them “an option to avoid inflation by cutting out at least one discretionary spending indulgence from their routines,” said PNC senior economist Kurt Rankin.

Inflation started to rise sharply in late 2020, as pandemic restrictions eased, and the rate remains well above 2019 levels. Price pressures initially grew because of supply-chain bottlenecks and high commodity prices, but those factors have significantly improved.

More recently, one factor supporting inflation is sustained demand for workers among service providers. Average hourly wages rose 4.4% in April from a year earlier, slightly faster than the prior month, while the unemployment rate fell to match the lowest level since 1969. Some companies are passing along higher labor costs to consumers.

Another factor is that companies have been able to raise prices, and boost profits, without prompting a backlash.

However, some companies say the significant pricing power they enjoyed in recent years has begun to fade amid early signs of a consumer pullback. Consumer spending, the primary driver of economic growth, has stagnated recently after jumping at the start of the year.

A slowdown in business investment and a weak housing market, both influenced by interest rates, have contributed to a broader economic cooling this year.

Businesses struggling with high input costs are trying new strategies. Becky Nelson, co-owner of Nelson’s Greenhouse in Clinton, Ind., recently decided that they would add a surcharge for customers who paid with credit cards, rather than raising prices. Encouraging shoppers to pay with cash will save the greenhouse on interchange fees.

They have also cut back on their offerings, opting to shut down the greenhouse over the winter to save money on propane, which they use to heat the 35,000-square-foot facility.

“We had to quit growing poinsettias,” Mrs. Nelson said. “It’s not that we don’t like growing year-round, it’s that we couldn’t keep up with the prices.”

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