WASHINGTON (TND) — Inflation slowed for the first time in 2024 last month after a hot start that pushed back the timeline for the Federal Reserve to begin cutting rates and raising concerns about prices staying higher for longer and requiring even higher interest rates to bring it under control.
The decline was modest, falling to 3.4% from 3.5% the year prior. On a month-to-month basis, prices increased by 0.3%. Core prices, which strip out volatile food and energy categories, reached the lowest level since April 2021 at 3.6% on an annual basis.
Higher prices for shelter and gasoline made up a majority of the monthly increases for April. The cost of housing has been a stubborn aspect of the inflation outlook for the Fed to get under control, with prices as measured by the CPI rising faster than they did before the pandemic. Economists have predicted that those prices would cool after several months of private sector data showed rents slowing, but that trend has not made it to federal data.
Wednesday’s consumer price index is a relief for the Fed and the White House after the first three months of 2024 brought higher prices than expected and dimmed hopes about the last mile of inflation quickly receding back to the central bank’s 2% target. Fed policymakers opted to maintain elevated interest rates at their meeting last month, citing the need to see “greater confidence” that inflation is falling before bringing interest rates down.
Fed chair Jerome Powell said on Tuesday that the hotter-than-expected data to start the year surprised the central bank and reiterated his stance that they will need to hold rates higher for longer than originally planned.
“We did not expect this to be a smooth road, but these were higher than I think anybody expected,” Powell said on Tuesday. “What that has told us is that we will need to be patient and let restrictive policy do its work.”
He also added that he was confident inflation will ultimately return to 2%. Inflation fell rapidly from 2022 when it reached a high of 9.1% in the summer, reaching 3% the following June after a series of interest rate increases from the Fed. Rates are at the highest levels in 23 years and went up at the fastest pace on record.
While the year has gotten off to a rough start in providing that confidence, there are some signs the elevated rates are having their intended effect.
“We still believe a broad disinflationary trend remains in place and five key elements should bring more disinflation throughout 2024: mildly softer consumer spending growth as evidenced by the goose egg retail sales print in April, moderating wage growth and slower job growth, declining rent inflation, narrower profit margins, and stronger productivity growth,” said Gregory Daco, chief economist at EY.
Higher interest rates from the Fed make it more expensive for businesses and consumers to borrow money for things like auto loans and credit cards, which slows the economy and eases the pressure on prices.
There are signs that is working, with retail sales data also released Wednesday showing consumers may be tiring of rampant spending that has powered the economy through inflation and higher interest rates. The Commerce Department said Wednesday that retail sales were flat in April, which was below economists’ expectations.
Slowing spending from consumers is also welcome news for the Fed’s quest to tame inflation. But Americans may be starting to reach a breaking point, especially lower- and middle-class households that have been beaten up by higher prices since the economic reemergence after the pandemic.
Data released Tuesday by the Federal Reserve Bank of New York showed more people are falling behind on credit card bills as their balances are growing. Credit card delinquencies are at the highest point in more than a decade and have doubled over the last two years, while balances are up 45% over the last three years. Higher balances are significantly more expensive in the elevated rate environment and can add years to paying off a balance making a minimum payment.
Along with cooler inflation and spending reports, the labor market also showed signs of cooling off in April with employers adding 175,000 jobs, a historically strong figure but significantly slower than the 200,000-plus added the previous four months. A strong labor market has helped consumers continue to spend despite higher prices and kept the economy from tipping into a recession but has also fueled concerns about inflation remaining sticky.
A steady but not roaring labor market could help central bankers ease interest rates later this year even if inflation remains modestly above its 2% target.
“We continue to expect two 25bps rate cuts in 2024, in July and November, as labor market conditions soften and core disinflation reasserts itself,” Daco said.
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