Headline inflation eased in April, but core prices rose more than expected
Policymakers at the Fed have been watching intently for signs that inflation pressures may be dissipating. Coming into today’s report, investors and policymakers had hoped that some easing in the monthly rate of change would be apparent. They were almost certainly disappointed.
The consumer price index (CPI) increased by 0.3% in April, moderately above consensus expectations, while dipping to its lowest one-month gain since August. That was the good news. As a result, headline inflation eased to 8.3% — the first decline after seven consecutive monthly increases dating back to August.
The concerning development was in the surprise surge in core inflation, which rose by 0.6% in April — a result above the high end of the range of economists’ forecasts for the month.
Energy prices dropped by 2.7% in April, as gasoline prices fell by 6.1% — providing at least a temporary reprieve to households that have felt the impact at the pump. Nonetheless, gas prices remain over 40% higher than a year ago — an added cost that’s a direct hit to consumer discretionary spending.
Consumers are still feeling the effects of rising food prices, which increased by another 0.9% last month. Grocery prices are up nearly 11% in the past year, but the greater concern lies in the potential for food prices to continue to rise in the coming months. The economic fallout from the conflict in Ukraine has been apparent on any number of fronts but has not yet been fully reflected in global food stocks and prices. Fertilizer prices have soared, as sanctions and the conflict itself impeded the export of key agricultural commodities and chemicals used in fertilizer production. Reduced grain exports from the region have also pushed food prices higher. Against that backdrop, concerns about the potential for further increases in food prices in the United States and across the globe are justified.
For those looking for a hopeful sign, the possibility that headline inflation topped out at 8.5% in March could provide it, but for the Fed, core inflation is much more important. The continued rise, and unexpectedly high single-month increase, are concerning and will only reinforce the need for policymakers to lean hard into rate hikes in the coming months.
Whether or not Fed Chair Powell’s recent effective dismissal of a potential 75-basis-point rate hike in June will come back to haunt him remains to be seen. The message was seemingly aimed at quelling investor concerns about an even more aggressive tightening cycle, and the market’s immediate reaction suggested that it was a message that was well received. The downdraft that occurred in the days that followed raises questions about whether or not that was the right message.
The Fed was already late in starting the tightening process; to take any potential weapons off the table, even with the best of intentions, has created additional doubt. Will a string of half-point hikes be enough for the Fed to catch up with still accelerating core inflation in a reasonable time frame? That’s the question for investors, and the growing concern. Will the combination of projected policy rate increases and quantitative tightening be enough to begin to knock inflation down? And conversely, can it be done without snuffing out growth? That’s the narrow path that the Fed must navigate, both in actual execution and in convincing investors that they can do so effectively.
The bottom line: The unexpected uptick in core inflation in April will raise the stakes for a Fed that still wants and needs the markets to believe that they are firmly focused on doing whatever is necessary to bring inflation pressure back under control in a reasonable time frame. Headline inflation may have finally rolled over, but the unrelenting upward pressure on core consumer prices suggests that the Fed’s battle against inflation is still in the early stages, with much work still to be done.
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