While
the
April
Consumer
Price
Index
report
showed
that
upward
pressure
on
prices
moderated
a
touch
last
month,
inflation
continues
to
take
a
meaningful
bite
out
of
Americans’
wallets.

The
report
showed
prices
rising
on
shelter
costs

which
includes
rents

along
with
used
cars
and
trucks
and
the
index
used
to
track
gasoline
prices.

However,
the
overall
annual
inflation
rate
ticked
down
to
4.9%
in
April
from
5%
in
March,
standing
well
below
December’s
6.5%
annual
rate
and
readings
north
of
8%
last
summer.

For
investors,
this
likely
leaves
the
Fed
on
track
in
June
to
hit
the
pause
button
after
interest-rate
increases
at
10
consecutive
policy
setting
meetings.

However,
the
Fed
is
seen
as
needing
further
improvement
in
inflation
before
lowering
interest
rates,
barring
a
sudden
negative
shock
to
the
economy.
Ithas
raised
interest
rates
aggressively
over
the
past
year
in
order
to
slow
the
economy
and
push
inflation
down
toward
its
2%
target
rate
as
measured
by
the
Personal
Consumption
Expenditures
price
index.

“Today’s
report
was
a
mixed
bag
in
terms
of
progress
against
inflation,”
says
Morningstar’s
chief
economist
Preston
Caldwell.
“But
without
signs
of
inflation
getting
worse,
we
still
expect
the
Fed
to
pause
on
rate
hikes
at
its
next
meeting
in
June.”

The Fed
last
week
 raised
its
target
for
the
federal-funds
rate
by
0.25
point
to
a
range
of
5.00%-5.25%
and
removed
language
from
its
official
statement
suggesting
that
additional
rate
increases
were
likely.
While
observers
widely
expect
the
Fed
to
hold
rates
steady
in
June,
bond
traders
in
the
futures
market
have
gone
a
step
further,
placing
bets
that
reflect
expectations
for
the
Fed
to
start
cutting
interest
rates
as
soon
as
September,
if
not
July.

The Bureau
of
Labor
Statistics
reported
 the
CPI
rose
0.4%
in
April
from
the
previous
month,
in
line
with
economists’
forecasts
and
up
from
a
0.1%
reading
in
March.
Excluding
volatile
food
and
energy
costs,
the
CPI
rose
0.4%
in
April,
also
near
economists’
expectations
and
at
the
same
pace
as
in
March.

Digging
deeper
into
the
April
report,
the
majority
of
price
increases
for
the
month
came
from
shelter,
used
cars
and
trucks,
and
gasoline.
Food
prices
were
unchanged
for
the
second
month
in
a
row.
Grocery
prices
fell
0.2%
over
the
month,
while
restaurant
prices
rose
0.4%.

In
addition
to
increases
in
shelter
costs
and
used
cars
and
trucks,
the
0.4%
increase
in
core
CPI
was
also
driven
by
motor
vehicle
insurance,
recreation,
household
furnishings
and
operations,
and
personal
care.
Airline
fares
and
new
vehicle
prices
decreased
over
the
month.


Good
News
on
Food
and
Energy
Costs

Overall
CPI
inflation
has
averaged
a
3.2%
annual
rate
in
the
past
three
months,
Caldwell
notes,
with
core
inflation
increasing
at
a
rate
of
5.1%.

“While
we
normally
focus
on
core
inflation
as
a
gauge
of
inflation’s
underlying
current,
it’s
encouraging
that
food
and
energy
are
helping
to
push
down
the
overall
index,”
Caldwell
says.
“While
oil
prices
had
been
the
main
driver
of
this
back
in
the
second
half
of
2022,
now
we’re
seeing
lower
natural
gas
prices
bring
down
household
utility
bills.”

In
addition,
Caldwell
says,
food
price
inflation
has
collapsed
as
supply
chains
have
improved.
“These
factors
should
continue
to
play
out
over
the
next
year.”


Housing
Inflation
Still
Rising

As
core
inflation
has
held
steady
in
recent
months,
shelter/housing
inflation
moderated
in
April
to
a
7.2%
rate
when
measured
on
an
annualized
three-month
moving
average
as
of
April,
according
to
Caldwell.
That’s
down
from
9%
as
of
January.
Meanwhile,
he
says,
core
inflation
excluding
shelter
has
increased
to
3.6%
annualized
as
of
April
from
1.5%
as
of
January.

“The
progress
on
housing
inflation
is
something
we
had
expected,
as
leading-edge
data
was
already
pointing
to
a
cooldown
in
rent
growth,
and
housing
demand
remains
weak,”
Caldwell
says.
“We
expect
housing
inflation
to
return
to
normal
over
the
next
year.”

Durable
Goods
Prices
Jumped,
for
Now

“The
main
driver
of
the
rebound
in
core
inflation
excluding
shelter
has
been
durable
goods,”
Caldwell
says.
Inflation
for
durable
goods
has
increased
to
4.5%
(annualized
three-month
moving
average)
as
of
April,
according
to
Caldwell,
up
from
negative
6.8%
as
of
January.
“About
half
of
this
rebound
is
attributable
to
a
rebound
in
used
car
prices,
although
we’ve
seen
an
uptick
in
other
areas
like
furniture
and
electronics.”

Caldwell
says
the
jump
in
durable
goods
inflation
isn’t
a
major
concern,
“as
supply
chains
have
been
drastically
improving
by
virtually
any
measure.”
Durables
prices
are
still
well
above
their
prepandemic
trend,
he
says,
“but
they
should
eventually
converge
much
of
the
way
back
to
that
trend
in
response
to
normalized
supply
chains.”

In
April,
energy
prices
rose
just
0.6%
over
the
month
after
falling
3.5%
in
March,
which
was
their
steepest
decline
since
August
2022.
Within
the
energy
component
for
April,
gasoline
prices
rose
3.0%
while
fuel
oil
prices
fell
4.5%.

Prices
for
used
cars
and
trucks
jumped
4.4%
over
the
month.
New
vehicle
prices
dipped
0.2%,
and
airline
fares
fell
2.6%.


Markets
Prepare
for
an
Interest-Rate
Pause

“We
still
think
that
the
Fed
will
pause
on
further
rate
hikes
for
now,
so
long
as
inflation
doesn’t
show
signs
of
accelerating—which
isn’t
manifest
in
today’s
report,”
Caldwell
says.

The
great
majority
of
market
participants
now
expect
the
federal-funds
effective
rate
target
to
hold
steady
at
its
current
range
of
5.00%-5.25%
at
the
Fed
meeting
on
June
14,
according
to
the CME
FedWatch
Tool
.
Expectations
haven’t
changed
materially
from
their
week-ago
levels.

“While
progress
has
been
slower
than
hoped,
inflation
has
already
fallen
greatly
compared
with
its
peak.
The
Fed’s
previous
tightening
still
probably
has
a
long
way
to
play
out
in
terms
of
slowing
down
the
U.S.
economy.”
Caldwell
says
the
current
situation
argues
for
a
period
of
wait-and-see.

Further
out,
the
majority
of
market
participants
now
foresee
the
Fed
lowering
its
target
rate
back
to
a
range
of
4.25%-4.50%
by
December.
Less
than
1%
of
market
participants
expect
the
current
rate
to
hold
steady
through
the
end
of
the
year.

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