April CPI preview: The clock is ticking for a September cut

Summary

A string of uncomfortably-hot inflation readings in the first quarter leaves a narrow window for inflation to downshift before a late summer rate cut by the Federal Open Market Committee (FOMC) is no longer on the table. We expect the April CPI report to demonstrate that while inflation is not as sticky as the Q1 pace indicated, the journey back to 2% remains slow-going.

Headline CPI likely rose by 0.4% for a third consecutive month in April, which would leave overall prices running at nearly a 5% three-month annualized rate. Progress in lowering core inflation, however, likely resumed. Excluding food and energy, we estimate prices rose 0.3%, which would break the streak of 0.4% gains since January and push the year-over-year rate down to 3.6%, a three-year low. Ongoing deflation in the goods sector is expected to help keep a lid on core inflation in April, but services arelikely to be the bigger driver of the softer print. We look for shelter inflation to have eased a bit further in April, and we anticipate a bigger step-down in core services ex-housing (+0.4% following a 0.6% rise in March).

While inflation has been stubborn in recent months, we do not believe the underlying trend is re-accelerating. Supply chain pressures are not easing as rapidly as a year or two ago, but they are not building either. Shelter inflation looks set to moderate further this year, while services ex-housing inflation should benefit from tamer growth in goods-related input costs and gradual loosening in the labor market. We expect to see monthly inflation prints trend lower over the remainder of the year as a result, with the core CPI subsiding to a 2.8% annualized rate in Q4 and the core PCE easing to a 2.1% annualized rate in Q4.

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