After several upside surprises, slightly cooler-than-expected US inflation data for April has suggested that disinflationary dynamics may be back on the cards. The rise in the headline index came in 10bps lower than the consensus expectation for a 0.4% gain. Core inflation also increased 0.3%, which was in line with expectations. That pushed the twelve-month rate in core inflation to 3.6%, marking the lowest such reading in three years. On a three-month annualised basis, which offers a better gauge of near-term movement, core inflation was 4.1% — marking a 0.4 percentage point drop, after steady rises through the second half of 2023.
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Following the large inflation shock in the immediate aftermath of COVID, a primary concern has been the extent to which inflationary dynamics persist. One method to assess this is to compare the inflationary dynamics of goods and services where prices have historically been relatively quick (flexible) or slow (sticky) to adjust. The Atlanta Fed’s flexible and sticky CPI indices do just that. These also show a slowing in near-term momentum for sticky CPI, with its three-month annualised rate easing to 4.5% from 5.2%, following a cyclical trough of 3.6% last July. A core measure of sticky prices that excludes housing costs shows a similar drop on a three-month annualised basis.
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Investors received the data as consistent with more monetary easing than had previously been expected, and the expected policy rate for December 2024 dropped a few basis points. That figure had increased by over 100 basis points since the beginning of the year, as market participants fretted about inflationary dynamics. However, expectations peaked at the end of April and have eased gradually since then.
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The Federal Open Market Committee (FOMC) has a dual mandate: inflation and employment. If inflationary dynamics continue to soften, or at least stop getting worse, then the labour market picture will come back into greater focus. And there continue to be signs of cooling. April’s payrolls data missed to the downside, with a 175,000 increase in net employment against expectations for a 243,000 increase. Meanwhile, the employment index of the ISM survey of non-manufacturing firms dropped to 45.9 in April, which is well below the threshold of 50 that separates contraction from expansion.
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Economic surprises have generally been trending downward recently. All told, the data are moving in a direction that appears consistent with a FOMC rate cut this year. For now, investors are pricing that to occur in September. But with a hotly contested presidential election due in November, the FOMC might be tempted to move sooner rather than later, opening up July as a potentially underpriced month for a policy easing.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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