US inflation takes a small step into the right direction

In the US, inflationary pressure eased somewhat in April, but remains too high.

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Dr Christoph Balz, Bernd Weidensteiner

Commerzbank Economic Research

May 15 2024

In the US, inflationary pressure eased somewhat in April, but remains too high.

The data

US consumer prices rose by 0.3% in April from the previous month, slightly weaker than the consensus and our expectations (0.4%). The year-on-year rate fell from 3.5% to 3.4%. The more important core rate, which excludes energy and food, was also 0.3% month-on-month, as expected. Here, the year-on-year rate fell from 3.8% to 3.6%.

... and the background

After consumer prices had risen more strongly than expected in the first three months of the year, the increase in April remained somewhat below expectations. This was due to the fact that surprisingly sharp price falls were observed for some goods and services. This was the case for new cars (-0.4%), used cars (-1.4%), rental cars (-4.6%), hotel accommodation (-0.3%) and airline tickets (-0.8%). Previously, particularly strong price increases had been recorded here at times.

In addition, rents and imputed rents are finally showing the long-awaited improvement. Taken together, this is the most important expenditure item, which in April recorded the lowest increase since the end of 2021.

The core rate of 0.3%, which is decisive for the underlying trend, shows slightly less price pressure than in previous months. However, prices are still rising too quickly. The Fed's inflation target of 2% per year relates to the deflator for personal consumption expenditures (PCE) and corresponds to around 2.4% or 0.2% per month for consumer prices (horizontal line in the chart). For inflation to ease significantly, rates would therefore have to fall further. To a certain extent, this seems quite likely as the US economy is losing some of its momentum. However, we maintain our view that inflation will remain too high in the longer term for structural reasons (demographics, protectionism, etc.).

Following the publication of producer prices yesterday, today's data now also provide the most important inputs for the estimate of the PCE deflator, which will be published at the end of the month. Our forecasts for April are 0.27% for the headline rate and 0.26% for the core rate.

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