US CPI Inflation Creates Uncertainty in the Market

The markets felt some respite last week after the release of the eagerly anticipated US April CPI inflation figure. The report provided evidence that inflation had not exceeded estimates. Moreover, it gave hope for future price reductions, which initially caused the USD to decline globally. A closer look at the report, however, made markets less persuaded that inflation was actually lowering. For instance, the USD actually somewhat recovered its losses.

The research found that prices for used vehicles and trucks grew by 4.4%. Besides, energy prices jumped by 0.6% on a monthly basis. Gasoline prices also went up by 3.0%. With an increase of 0.4% in April compared to 0.6% last month and 0.8% in February, the price of housing continued to grow. Albeit more slowly than it had the month before. Housing expenses have increased by 8.1% over the course of the year. Meanwhile, accounting for 34% of the CPI overall and significantly contributed to the high inflation over the past 12 months. Analysts still believe that home expenses will moderate in the upcoming months, though.

Food costs remained constant for the second consecutive month. However, they have climbed by 7.7% over the year, which contributes 13.7% of the CPI. In April, the core CPI, which excludes food and energy prices, increased by 0.4%. The rise was propelled by various indices, including shelter and motor vehicle insurance. On the other hand, the airline rates and new vehicle indexes experienced a drop during the same month.

Commodity Expenses Increasing, Despite the Positive Market Expectation

Despite the report’s comforting data, the inflation rate is still much above the Fed’s target of 2%. The Fed funds rate (goal range: 5.00% to 5.25%) is currently higher than the 4.9% annual inflation rate. Following the release of the report, yields are lower, with the 2-year yield falling -7.1 basis points and the 10-year yield falling -6.6 basis points. Stocks are experiencing gains, with premarket futures predicting an increase of 70 points for the Dow industrial average. The S&P and NASDAQ indexes are also up, with gains of 16 and 63 points, respectively.

The headline CPI MoM level from a year ago increased by 1.0% in the following month. The rate after that was a 1.3% gain, meaning that going forward, 2.3% will come out of the YoY number. If we substitute that with 0.6% and 1.7%, 5% becomes 3.3%. This suggests that even though the present inflation rate is still high, there is optimism for a drop in inflation in the near term.

To sum up, even though the US April CPI inflation report came in below expectations, the inflation rate is still much higher than the Federal Reserve’s 2% target. The survey showed rising expenses for gasoline, energy, secondhand automobiles, and trucks. The ongoing increases in housing expenditures were also a major factor. Analysts still believe that home expenses will moderate in the upcoming months, though. There is hope for a reduction in the inflation rate in the near future because the headline CPI MoM level from a year ago is probably going to be replaced by something significantly lower in the following month.

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