Consumer inflation in the United States showed signs of cooling last month, with prices rising by 0.3% from March to April, down slightly from the previous month. The year-over-year inflation rate also ticked down from 3.5% to 3.4%. This slight moderation in inflation may offer some relief to officials at the Federal Reserve and President Joe Biden’s re-election team. The underlying inflation rate, which excludes volatile food and energy costs, hit its lowest level in three years, signaling a possible slowdown towards the Fed’s 2% target.
Fed Chair Jerome Powell had previously suggested that rate cuts were likely this year, but has now emphasized the need for greater confidence that inflation is falling before reducing borrowing rates. The report of moderating price increases in April may provide some reassurance that inflation could be resuming its decline towards the target level. However, grocery prices slipped in April, with egg prices falling by 7.3% and new and used car prices dropping. Gas and clothing prices saw increases, while apartment rental prices remained high, accounting for a significant portion of the year-over-year increase in core prices.
The impact of inflation on the presidential race is significant, with Republican critics of Biden attempting to pin the blame for high prices on him in an effort to derail his re-election bid. While hiring remains strong and wage growth is healthy on average, prices are still above their pre-pandemic levels. Powell reiterated his expectation that inflation will reach the central bank’s 2% target, but acknowledged his confidence in that forecast has weakened. The Fed has raised its key interest rate to 5.3% in an effort to quell rising prices and Powell indicated that rate cuts won’t begin as soon as hoped.
The high inflation figures in recent months have divided economists, with some seeing it as a re-acceleration in price growth and others attributing it to pandemic-related distortions. Factors such as soaring auto insurance costs and elevated apartment rents have contributed to persistent inflation. Powell noted that rising rents are keeping inflation high, and acknowledged that the economy is different this time due to many Americans refinancing their mortgages at low rates before rate hikes began. Businesses also locked in low rates, which may be minimizing the impact of the Fed’s rate policy on the economy. Measures of new apartment leases show rents barely increasing, but overall rent growth has yet to ease in government data. Powell expects the government’s measures to eventually reflect rent growth easing.
