Following the latest data on inflation and the change in the American economy, several Federal Reserve officials have stated that the central bank should maintain high borrowing costs, suggesting they are not in a hurry to cut interest rates.
Federal Reserve Bank of Cleveland President Loretta Mester, Federal Reserve Bank of New York President John Williams, and Federal Reserve Bank of Richmond President Thomas Barkin, speaking separately, argued that it may take more time for inflation to reach its 2% target.
Data released showed a measure of underlying U.S. inflation declining in April for the first time in six months, which will help move in the direction desired by Fed officials before considering rate cuts.
The core Consumer Price Index (CPI) in the United States rose by 0.3% in April, which is in line with expectations and an improvement from the previous month. Regarding details, core services inflation, excluding housing, slowed to 0.42%, down from 0.65% in March, while transportation services inflation slowed to 0.86%. Automobile insurance, which had risen by 2.6% in March, slowed to a still robust rate of 1.8%.
In a different survey, the Producer Price Index (PPI) unexpectedly climbed by 0.5% compared to the previous month, exceeding the 0.3% consensus expectation. This was primarily driven by services, marking a reversal from the revised downward 0.1% drop in March.
The PPI report showed service fees climbed by 0.6%, the sharpest increase since July, accounting for nearly three-quarters of the overall index rise. The price of goods increased by 0.4% due to rising fuel costs.
Retail gasoline prices rose in April to their highest level since October, even though they slightly declined this month. The recent moderation in crude oil prices suggests further declines to come.
By removing food, energy, and trade services, which are even less volatile measures, the price index rose by 0.4% in April after gaining 0.2% in March.
In summary, despite investors’ hopes for some positive signs, the figures are not encouraging. They are above consensus, indicating future inflation increases.
Although markets seemed relieved that the inflation data did not show a further uptick, as was the case in the first three months of the year, these data remain concerning. The United States will need a more substantial slowdown in consumer goods prices before the Fed considers rate cuts.
The reality is that the Fed will likely revise its projections for 2024 from three rate cuts to two in June, and given the resilience of the American economy, it is likely that it will need to do less than the current consensus expects.