What the latest consumer price data tells us about the US economy

The most recent Consumer Price Index (CPI) statistics for April showed a more marked decline in retail sales and a little moderating of core inflation, which sparked rumours about potential future rate-cutting actions by the Federal Reserve. The S&P 500 began sharply higher after the news, indicating optimism in the market.

CPI Inflation Data Highlights

The overall consumer price index gained 0.3 per cent in April, meeting economists' estimates. The year-over-year CPI inflation rate fell to 3.4 per cent, as expected. Core CPI, which excludes volatile food and energy costs, was up 0.3 per cent month on month, with the annual rate falling to 3.6 per cent from 3.8 per cent in March, continuing the drop from its 40-year peak of 6.6 per cent in September 2022.

Retail Sales Performance

Retail sales in April did not rise by the 0.4 per cent that was predicted; instead, they stayed flat. Excluding automobiles, retail sales increased by 0.2 per cent, in line with projections; however, the initially reported 1.1 per cent gain in non-auto retail sales was later revised down to 0.9 per cent.

Detailed CPI Breakdown

In April, energy costs increased by 1.1 per cent, but food prices remained unchanged. Costs for food consumed outside the home increased by 0.3 per cent, offsetting a 0.2 per cent decrease in costs for food consumed within.

There was a decline of 0.4 per cent in the price of new vehicles and a 1.4 per cent decrease in the price of used cars and trucks.

The cost of housing increased steadily, as both rent and owner's equivalent rent increased by 0.4 per cent. By comparison, rates at hotels and motels decreased by 0.2 per cent. While airline tickets decreased by 0.8 per cent, the cost of medical care and transportation services increased by 0.4 per cent and 0.9 per cent, respectively.

Fed Rate-Cut Implications

The core PCE price index, which is the Fed's main indication of inflation, increased by 0.24 per cent in April.

With the likelihood of a rate cut by the July 31 meeting falling to 31 per cent from 33 per cent, market reactions modified expectations for a rate cut by the Fed. On the other hand, the likelihood of a rate cut by September 18 rose from 68 per cent to 71 per cent.

Market Response

After the release of the CPI report, the S&P 500 increased by 0.8 per cent and reached a record intraday high. This increase comes after Tuesday's advances fuelled by statistics on healthcare inflation from the producer price index that were encouraging.

The index closed barely 0.15 per cent below its record high set on March 28. Furthermore, the yield on the 10-year Treasury dropped seven basis points to

4.37 per cent.