April CPI: It's a start

Summary

The first CPI report of Q2 should be seen as welcome news by the FOMC. The headline CPI rose 0.3% in April, a tenth below consensus expectations, while the core CPI also increased 0.3%, in line with expectations but a downshift from the pace registered in Q1. Flat food prices and a decline in energy services prices helped to partially offset a jump in gasoline prices in the headline index. Excluding food and energy, more deflation for vehicles prices and a moderation in price growth for medical care services, motor vehicle insurance and motor vehicle maintenance contributed to the slowdown in core CPI.

Based on the April CPI and PPI data, we estimate the core PCE deflator increased 0.25% month-over-month in April. If realized, this would bring the three-month annualized and year-over-year rates to 3.4% and 2.8%, respectively. On balance, the April inflation data should help restore some confidence at the Fed that price growth is continuing to moderate through the month-to-month noise. That said, we think it will take more than just one solid CPI report to induce the first rate cut. We believe it will take at least a few more benign inflation readings for the FOMC to feel sufficiently confident to begin lowering the fed funds rate. We continue to look for the first rate cut from the FOMC to come at its September meeting, but any additional bumps in the road would likely push that timing back, absent a marked deterioration in the labor market.

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