The April Consumer Price Index (CPI) report indicates that inflation may be easing from the higher levels seen in February and March. However, inflation in 2024 still remains higher than the low levels reported in late 2023. Overall, April’s inflation figures offer hope for lower interest rates in 2024, but more data will be needed for the Federal Open Market Committee (FOMC) to be confident that inflation is moving towards its 2% annual target.
In April 2024, CPI inflation rose 0.3%, remaining at 0.3% when food and energy are excluded. This is lower than the 0.4% increases seen in February and March, but still higher than the 0.1% to 0.2% inflation experienced in late 2023. The FOMC’s annual inflation target of 2% corresponds to inflation running at just under a 0.2% monthly rate. While April’s data suggests improvement in the inflation picture, it is not yet fully on track to meet the FOMC’s target. Core inflation fell to a 3.6% annual rate in April, the lowest level since March 2021, while headline inflation remained at 3.4%, above levels seen in 2023.
Shelter, a key component of the CPI calculation, did not cool as much as hoped in April’s report, rising 0.4% for the month and 5.5% annually. Vehicle prices continue to decline, and there were price declines in food away from home. Inflation pressure continues to come mostly from services, with transportation services and car insurance seeing steep price increases, while medical and household services are showing signs of cooling prices. If shelter costs were to cool, inflation may have a better chance at reaching the FOMC’s 2% target.
Future inflation releases are expected to be more encouraging for the FOMC based on nowcast models from the Cleveland Fed. The upcoming update to the Personal Consumption Expenditures Price Index for April is projected to increase by 0.1% to 0.2%, which should be viewed favorably by FOMC officials. For May’s CPI report, nowcasts anticipate a 0.1% increase in headline inflation and a 0.3% rise in core inflation. While this may not be as comforting for the FOMC, it still suggests that inflation is relatively contained.
With the jobs market performing well, the FOMC is likely to take a wait-and-see approach to upcoming inflation data and hold rates steady at the June meeting. However, fixed income markets anticipate up to two interest rate cuts in 2024. The April CPI report offers some encouraging signs, indicating that interest rate cuts may be possible later in the year. Overall, while inflation in 2024 is still higher than desired, there are positive developments that could lead to lower interest rates and a more stable inflation outlook.
