Inflation slows as high interest rates take effect

Down notably from a peak just above 9%

Inflation slowed for a 10th straight month in April, a closely watched report showed Wednesday, good news for American families struggling under the burden of higher costs and for policymakers in Washington as they try to wrangle rapid price increases.

The consumer price index climbed 4.9 percent in April from a year earlier, less than the 5 percent that economists in a Bloomberg survey had expected. Inflation has come down notably from a peak just above 9 percent last summer, although it has remained far higher than the 2 percent annual gains that were normal before the pandemic.

After stripping out food and fuel to get a sense of the underlying trend in price increases — what economists call a core measure — consumer prices climbed 5.5 percent from a year earlier, a slight drop from 5.6 percent in the previous reading.

The slowdown in price increases last month came even as gas costs picked up and rent costs continued to climb fairly briskly. New car prices, a measure of the price of medical care, and airfares all declined in April, the report showed, helping to pull inflation lower.

Stock prices surged in response to the data, as investors greeted it as good news for the Federal Reserve. Economists and data analysts agreed that the report offered further evidence that inflation is meaningfully moderating, but said that the road back to normal prices still remained a long one.

“Inflation is still sticky. I don’t think that the Fed is going to look at this and cut rates, or heave an especially big sigh of relief,” said Priya Misra, head of global rates research at TD Securities.

“Not so fast. We can’t draw the conclusion that the inflation problem is over.”

For instance, a closely watched measure of services prices outside of housing costs pulled back meaningfully, but in a way that may not be sustainable. The measure climbed 5.2 percent on a yearly basis, down sharply from 5.7 percent in the previous reading, based on a Bloomberg calculation.

That was an encouraging sign that a stubborn component of inflation is finally on the verge of cracking, but it was also driven partly by a slowdown in travel expenses that might not last, said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives.

That slowdown offered “a little bit of good news, but also probably a little bit of a head fake,” she said.

While inflation has been gradually cooling for months now, it has remained too elevated for policymakers to be comfortable. Much of the slowing in price increases has come as supply chain bottlenecks have cleared up, goods shortages have eased, and gas prices have moderated after a surge in summer 2022 that was tied to Russia’s invasion of Ukraine.

But underlying trends that could keep inflation persistently high over time have remained intact, including unusually strong wage growth, which could prod companies to try to charge more for products and services.

Fed officials are likely to pay close attention to the April inflation report. They have raised interest rates over the past year at the fastest pace since the 1980s to slow lending and weigh down the economy, but now that borrowing costs are above 5 percent, policymakers have signaled that they could pause rate moves as soon as their mid-June meeting. That decision will hinge on incoming economic and financial data, they have said.

Policymakers will receive the consumer price report for May on June 13, the day before their decision, but officials typically give markets at least a hint of what they might do with rates ahead of time. That puts significant focus on the April report.

“It probably keeps them on track to pause at the next meeting,” Rosner-Warburton said of the latest inflation data, explaining that she does not think the price slowdown is sufficient to convince policymakers that they should change course and actually lower interest rates anytime soon.

John C. Williams, president of the Federal Reserve Bank of New York, told reporters in New York on Tuesday that the Fed’s next decision — on whether to raise rates or pause at the June meeting — would hinge on incoming data.

He said that it had been appropriate for the Fed to raise interest rates through May to try to get them to a restrictive stance, and now “we’ll adjust policy going forward based on what we see out there.”