As energy prices experienced what now appears to be a brief uptick in April, the consumer price index increased generally in accordance with forecasts. Energy and grocery costs were excluded from the core CPI inflation rate, which still showed strong price pressures, but the Fed’s primary concern, services, were not the main driver. Following the release of the CPI report on Wednesday, the S&P 500 increased, but by early afternoon, gains had been reversed.
Report on CPI Inflation: Hits and Misses
To 4.9%, the CPI inflation rate decreased. A consistent inflation rate of 5% was predicted by economists. According to expectations, the consumer price index increased 0.4% month over month.
As predicted, the core CPI increased by 0.4% from March’s levels. In line with expectations, the annual core inflation rate decreased to 5.5% from 5.6% in March. In September, the core CPI inflation rate reached a 40-year high of 6.6%.
Core nonhousing services, as released with the Commerce Department’s late-month personal income and outlays statistics, have been cited by Fed Chair Jerome Powell as the most significant spending category for the inflation forecast. Although it has significant flaws, Wall Street looks to the CPI indicator of services less rent as a pretty close equivalent.
According to the CPI for April, prices for services less housing rent increased by 0.4% on the month, down from 0.6% in March. The growth over the previous year decreased from 7.1% in March to 6.8%. However, the monthly statistic was skewed due to a 0.1% decrease in the price of medical care services. That represented a monthly decrease in health insurance costs of 3.8%. The CPI report’s approach, however, which concentrated on health insurance profits from the prior year, fails to produce a timely, pertinent data point.
Impact of Fed Policy
Markets were putting in roughly 19% odds of a quarter-point Fed rate hike on June 14 before the release of the CPI report. After the CPI statistics, that decreased to 5%. Although low, it indicates that the Fed’s signal of a pause in rate hikes last week isn’t taken seriously.
Powell, however, said that the Fed has the “luxury” to wait and see how the data turns out due to continuous balance-sheet tightening caused by the sale of Treasuries and mortgage securities purchased during the pandemic emergency and a five percentage point rate hike.
The Fed believes that economic risks are tilted to the downside due to tightening bank credit and an increase in jobless claims.
CPI Report Information
After increasing by 0.2% in March and being steady in February, core goods prices increased by 0.6% on a monthly basis. Consequently, the 12-month core goods inflation rate increased from 1.5% to 12%.
Although they are still down 5.1% from a year ago, energy prices increased 0.6% on a monthly basis.
After a 0.3% reduction in March, prices for food purchased at home continued to rise moderately, declining by 0.2%. Prices have risen by 7.1%.
Food away from home prices rose a more moderate 0.4% from March, following three monthly gains of 0.6%. That left the year-over-year increase at 8.6%.
The CPI report showed used car prices jumping 4.4%, after sliding the prior six months. New vehicle prices dipped 0.2%.
Apparel prices rose 0.3% and are now up 3.6% from a year ago.
Transportation services prices slipped 0.2% after March’s 1.4% gain. Prices for shelter decelerated, with April’s 0.4% gain following 0.6% and 0.8% rises the prior two months.
S&P 500 Reaction To CPI Report
After the CPI report, futures reversed higher, with the S&P 500 nearly 1% morning trade. But the S&P 500 had reversed to a 0.1% loss around 1 p.m. ET. The S&P 500 slipped 0.5% on Tuesday, but closed just 1.1% below the Feb. 2 level — the peak of the fall-to-spring rally.
The 10-year Treasury yield slipped 7 basis points to 3.45%.
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CPI Proxy For Core Nonhousing Services
It is possible to construct an inflation index out of the CPI that bears some relation to the core nonhousing services category highlighted by Powell.
Start with services less rent of shelter. Subtract energy services and health insurance (which is derived from last year’s health insurer profits). Then add lodging and food services. In April, the CPI proxy for core nonhousing services saw prices rise a more moderate 0.3%, following several gains of 0.5%-0.6%. On a 3-month annualized basis, the inflation rate eased to 5.7% from 6.6% in March.
This CPI category covers just over 29% of consumer outlays, while PCE core nonhousing services covers about 50% of household spending. In other words, there are still huge differences. Health care is a glaring one, since it accounts for nearly 16% of PCE spending, while medical services amounts to less than 7% of CPI budgets.
The best clue to PCE health services inflation won’t come from the CPI but from Thursday’s producer price index. The PPI medical services component feeds directly into the PCE.