April saw a decrease in inflation, as prices for eggs, bacon, and bread fell, according to CPI data. The decline in grocery and used car prices offset the increase in rent and gasoline costs. While this progress in taming prices is positive, it may not be enough to convince the Federal Reserve to cut interest rates in the near future. Overall, prices increased 3.4% compared to the previous year, slightly lower than the 3.5% increase in March. On a monthly basis, costs rose 0.3%, which is lower than the previous month but higher than the readings from last fall. Core inflation, which excludes volatile food and energy items and is closely monitored by the Fed, increased 0.3%, bringing the annual inflation rate down to 3.6%, the lowest since April 2021. While inflation unexpectedly accelerated in the first quarter, it is still significantly lower than the 40-year high of 9.1% in June 2022.
After the resolution of pandemic-related supply chain issues, the prices of goods such as used cars, furniture, and appliances, which had skyrocketed during the health crisis, have started to decrease. However, the cost of services like rent, car insurance, repairs, and recreation continues to rise steadily. This is partly due to the gradual slowdown in wage growth following labor shortages caused by the pandemic.
The impact of high interest rates is significant, leading to the cancellation of planned projects such as apartments, wind farms, and shops.
Will interest rates decrease? According to Nationwide Chief Economist Kathy Bostjancic, Wednesday’s report “maintains the possibility of the Fed starting to lower rates in September.” If the Fed cuts rates, it would reduce borrowing costs for mortgages, credit cards, and consumer loans, providing particular assistance to low- and middle-income Americans. However, it would also lower yields on bank savings accounts, which have recently become more generous after years of minimal returns.
In late March, the Fed was predicting three rate cuts for this year after a significant slowdown in price increases in 2023. However, due to three consecutive months of high inflation in March 2024, Fed Chair Jerome Powell and other central bank officials have stated that rates are likely to remain higher for a longer period as they wait for a more sustainable approach towards the Fed’s 2% target.
Powell reiterated this message at a conference in Amsterdam on Tuesday, emphasizing the need for patience and allowing restrictive policies to take effect.
The futures market is now predicting that the Federal Reserve will make its first interest rate cut in September, with another cut expected in December. This is a change from its previous prediction of a rate cut in June and three cuts in 2024, before the recent increase in inflation.
In terms of the stock market, investors are reacting positively to the slight slowdown in inflation, as it keeps hopes alive for potential rate cuts this year. All three major stock indexes – the Dow Jones Industrial Average, the S&P 500, and the Nasdaq – reached new record highs. The Dow Jones closed up 349 points at 39,908, the S&P 500 was up 1.2% at 5,308, and the Nasdaq rose 1.4% to 16,742.
Gas prices in the US are on the rise again, increasing by 2.8% in April. This marks the third consecutive monthly increase following four months of declines. The increase can be attributed to the higher demand as the spring driving season begins, as well as refiners switching to more expensive summer blends.
As for rent in the USA, it has been steadily increasing. In March, rent went up by 0.4%, adding to a series of hikes. Although the annual rise decreased slightly from 5.7% to 5.4%, economists expect rent increases to slow down for new leases, but the impact on existing leases has been gradual. Housing and gas costs account for over 70% of the overall increase in prices.
Some other services have also seen price increases. Auto insurance has jumped by 1.8% in the past month and is up by 22.6% compared to a year ago. Medical care costs have increased by 0.4%, while personal care services like haircuts and laundry have seen a 1.1% increase. However, airfares have fallen by 0.8% and hotel rates have edged down by 0.2% as the summer travel season approaches. Car repair costs have remained steady but are still up by 7.6% compared to last year.