April CPI Preview: Fed Is Likely to Remain Hawkish Despite Possible Core Inflation Alleviation

On May 15, the U.S. Bureau of Labor Statistics will release CPI data for April at 8:30 a.m. ET. This will be the first of two CPI releases before the next Federal Open Market Committee meeting on June 12. However, the subsequent May CPI release will be on the morning of the FOMC’s June interest rate decision day.

Economists expect U.S. CPI to fall from 3.5% to 3.4% in April, while core CPI will likely fall to 3.6% from 3.8%.

Morgan Stanley noted in the latest analysis that "Core CPI inflation steps down in April with weaker services as the main driver. We expect weaker car insurance inflation, continued rents disinflation, and lower healthcare. "

The average crude oil spot price was at a level of $88.01 in April, up from $83.55 last month and up from $82.46 one year ago. This is a change of 5.35% from last month and 6.73% from one year ago.

However, oil prices have continued to fall since early April since demand-side uncertainties weighed on the market. US gasoline and distillate inventories rose in the week ahead of the summer driving season, indicating weak demand.

The FAO Food Price Indexfrom the Food and Agriculture Organization of the UN stood at 119.1 points in April 2024, up 0.3 points (0.3 percent) from its revised March level, as an increase in the price index for meat and smaller upturns of vegetable oil and cereal indices slightly more than offset decreases in those for sugar and dairy products. It registered a second monthly uptick in April following a seven-month long declining trend, and it was down 9.6 points (7.4 percent) from its corresponding value one year ago.

From a national perspective, rental pressure is gradually easing due to the imbalanced relationship between supply and demand.

“It seems we are firmly settled into the year of the renter as people have more options now than in recent memory,” says Zumper CEO Anthemos Georgiades. “With Class A buildings marketing concessions that include up to three months of free rent, free parking, and waived deposits and application fees, this, in turn, puts pressure on Class B and C buildings to price competitively as well in order to attract tenants.”

However, the cost of living in certain cities remains high. New York City continues to buck national trends, with rent up 20% since this time last year and up 50% since pre-pandemic days.

Standard Chartered Bank's Chief FX Strategist Steven Englander's latest report showed how much rent inflation needs to decrease. Before the pandemic, commodity inflation was about -1%, housing inflation was about 2.5%-3.5%, and non-housing service inflation was slightly above 2%—with the overall core inflation rate just below 2%.

Therefore, to bring the inflation rate back to the 2% level, non-housing service inflation must drop from the current 3.5% to below 3%, and housing inflation must decrease from 5.8% to around 3.5%.

According to Cox Automotive's May update, the average transaction price for new cars is $47,244. That's down 2.2% year-over-year.

Some new car segments are seeing notable price declines in 2024, while others are holding firm. The luxury vehicle segment has experienced notable price reductions, largely due to Tesla's aggressive pricing strategies. Luxury vehicle prices have dipped 7.4% YoY. Tesla's average transaction prices (ATPs) plummeted by a whopping -20% compared to September 2022, as the brand pushes for higher sales volumes.

On the flip side, non-luxury vehicles have seen a price increase of less than 1% YoY.

Wholesale used-vehicle prices were down in April compared to March. The Manheim Used Vehicle Value Index (MUVVI) fell to 198.4, a decline of 14.0% from a year ago. The seasonal adjustment to the index magnified the results for the month, resulting in a 2.3% month-over-month decrease.

Although April's core CPI report could appear encouraging, the Fed cares more about the core PCE deflator — next due May 31. Economists generally think PCE inflation could run hotter than CPI. One key difference is that the PCE deflator counts food away from home as part of the core. With evidence accumulating that California restaurants are raising menu prices because of the state's 20% fast-food minimum-wage hike, this component will keep upward pressure on core PCE.

CME FedWatch shows that the probability of the Fed keeping interest rates unchanged in June is 96.5%, and the probability of keeping the current rates in July is 74.6%. Overall, the upcoming inflation report likely won't bolster policymakers' confidence to cut rates very soon. Still, the inflation picture for April will be marginally better — or at least, no worse — than in March.

Source: Ychart, Zumper, Manheim, Federal Reserve