Headline inflation cooled in April, but not enough to give the Federal Reserve much comfort. The Consumer Price Index rose 0.6 percent last month, down from March’s 0.9 percent increase. Yet the year-over-year rate moved in the wrong direction, rising to 3.8 percent from 3.3 percent and extending the reversal of the disinflationary trend that had prevailed earlier this year.
Core inflation told a less encouraging story. Excluding volatile food and energy prices, CPI rose 0.4 percent in April, double the 0.2 percent pace recorded in each of the prior two months. The year-over-year core rate also ticked up, rising to 2.8 percent from 2.6 percent.
The moderation in headline CPI mainly reflected slower energy price growth. Energy prices rose 3.8 percent in April, well below March’s 10.9 percent surge, while gasoline prices climbed 5.4 percent after jumping 21.2 percent in March. Even so, gasoline prices are up 28.4 percent over the past year, reflecting the cumulative effect of the oil shock tied to the conflict involving Iran and disruptions to shipping through the Strait of Hormuz.
But the April report was not simply an energy story. Shelter, which accounts for about one-third of the CPI, rose 0.6 percent after increasing 0.3 percent in March, although the increase is likely due to mismeasurement stemming from last fall’s government shutdown. Food prices rose 0.5 percent, with grocery prices up 0.7 percent. Several core categories also posted sizable increases: household furnishings and operations rose 0.7 percent, airline fares jumped 2.8 percent, personal care rose 0.7 percent, and apparel increased 0.6 percent. New vehicle prices, communication prices, and medical care moved lower, but not by enough to offset the broader firming elsewhere.
The three-month trend is the clearest sign that price pressures have strengthened. From February through April, headline CPI averaged 0.6 percent per month, equivalent to roughly a 7.4 percent annual rate. That figure is distorted by March’s energy spike, but core inflation points in the same direction without the energy noise. Core prices averaged roughly 0.27 percent per month over the same period, or about 3.2 percent annualized, above the 2.8 percent year-over-year core rate.
The Federal Reserve officially targets the personal consumption expenditures price index, not CPI. But the April CPI report still gives policymakers little reason to consider easing. Inflation remains above target, core inflation has picked up, and the recent monthly data look worse than the year-over-year figures suggest. Markets agree: the CME Group’s FedWatch tool shows futures pricing in an almost certain hold at the Fed’s June meeting and little expectation of a rate cut this year.
The labor market does not provide much of an offsetting argument. April payrolls rose 115,000, and the unemployment rate held steady at 4.3 percent. Average hourly earnings rose 0.2 percent in April and 3.6 percent over the past year. That is not an overheated labor market, but neither is it one showing enough weakness to justify rate cuts in the face of firmer inflation.
Following the April FOMC meeting, Chair Powell described an economy “expanding at a solid pace,” with a labor market that had changed little and inflation that remained elevated. The latest data support that characterization. Powell also pointed to tariffs and oil-driven energy costs as important sources of above-target inflation. The April CPI report complicates that diagnosis. Energy clearly mattered for headline inflation, but the acceleration in core prices, the pickup in shelter, and the breadth of monthly gains suggest price pressures are not confined to oil or tariffs. Additionally, the latest Producer Price Index out today, a leading indicator for future consumer price rises, points to hotter inflationary pressures on the horizon.
That matters for policy. If inflation were only the result of a temporary energy shock, the Fed could look through some of the increase. But when core inflation accelerates and shelter costs pick back up, easing becomes much harder to justify. Rate cuts would do little to produce more oil or clear shipping lanes, but they could add demand to an economy where inflation is already running too hot.
The Fed should not overreact to one CPI report. But it should not ignore the signal either. Headline inflation remains elevated, core momentum has firmed, and the labor market is not weak enough to call for easier policy. The case for cutting rates is extremely weak. The Fed should hold.
