Inflation remains sticky in April, rising by 4.9% over a year ago

REAL ECONOMY BLOG | May 10, 2023

Authored by RSM US LLP

Strong demand for transportation and gasoline in April bolstered by rising incomes and excess savings showed that inflation, while easing, is likely to remain sticky for the foreseeable future despite falling to 4.9% in April from 9.1% last June.

April’s increase in the consumer price index was in line with RSM’s forecast of a 4.9% gain and the consensus estimate of 5%, and will most likely support the doves at the Federal Reserve who want to pause interest rate increases.

With underlying inflation running somewhere between 3.5% and 4% and service sector demand easing, the central bank is, in our estimation, well positioned to pause the increases given the rising risks to the outlook.

These risks include concerns around financial stability at small and medium sized banks, especially when it comes to commercial real estate, as well as the standoff over raising the nation’s debt ceiling.

It all points to a likely pause at the Federal Open Market Committee’s June meeting despite the sticky inflation that is evident inside the April CPI.

Nevertheless, another rate hike in June is still a live option given the elevated rate of inflation and a core reading of 5.5% that is simply unacceptable.

The data

In April, the CPI increased by 0.4% on the month and by 4.9% on a year-ago basis, while the core reading that excludes food and gasoline increased by 0.4% on the month and by 5.5% from a year ago.

The so-called supercore inflation, or services excluding housing, which is the Fed’s key policy metric inside the CPI, advanced by 0.2% on the month and by 5.1% on a three-month annualized basis.

Housing costs increased by 0.2% in April and were up by 7.5% on a year-ago basis. Shelter costs advanced by 0.4% and by 8.1%, respectively, and the policy-sensitive owners’ equivalent rent series increased by 0.5% and by 8.1%.

We expected that, because of the way housing costs are estimated, they would continue to increase until midyear and then begin to fade, which is consistent with other real-time data on rents and prices.

This eventual easing, along with other goods and services price declines, will result in a drop in overall CPI toward 3% to 3.5% by the end of the year.

Service sector prices increased by 0.2% and 6.8% on a year-ago basis. On a three-month average, the rise in service prices slowed to 3.3% from 4.6% previously, which is a much-desired development in a sector that makes up 61.59% of the CPI.

The primary drivers of inflation in April were the increases of 3% in gasoline, 2.7% in energy commodities and 0.6% in overall energy costs.

Demand for transportation increased by 1.2% because of a 4.4% increase in the cost of used cars and trucks. New vehicle prices declined by 0.2%. Airfare prices declined by 2.6% in April.

Apparel costs increased by 0.3%, while medical care costs and recreation costs had no increase. Commodity prices increased by 0.6%.

The takeaway

Inflation is easing because of favorable comparisons to last year’s high oil and energy prices, and the CPI will continue to decline because of falling shelter and owners’ equivalent rent. Those declines should put the economy on a path toward an overall inflation rate in the 3.5% to 4% range.