April Inflation Report Unlikely to Alter Fed’s Path

The markets’ immediate enthusiasm following the April U.S. consumer price index (CPI) report likely reflected relief that inflation did not surprise to the upside, rather than any implied change in the outlook for Federal Reserve policy.

U.S. Treasury yields declined and equity markets rose following the report that core CPI inflation rose 0.3% in April, in line with consensus (and our) expectations, and cooler than the previous month’s data. However, inflation remains well above the Fed’s target, and we would temper any hopes for more or faster policy rate cuts based on this report. That said, in our view the report makes the already remote possibility that the Fed considers hiking rates even less likely.

Fed officials will update their interest rate projections at their next meeting in June, and given recent macro data, we expect the rate path implied by the median “dot” to shift meaningfully higher.

April CPI details positive, but not too encouraging

The slight decline in inflation in April from March was led by lower prices for core goods such as used cars, new cars, and appliances, and a deceleration in the pace of price rises for certain core services like transportation and rent. However, inflation in owners’ equivalent rent (OER) remained strong, and we expect this component will remain relatively stubborn as lease renewals catch up to market rents and single-family rents outperform multi-family.

Overall, we don’t believe the April inflation data were weak or surprising enough to change our medium-term inflation forecasts or our Fed outlook.