April CPI preview: The trend is your friend

Summary

After an unexpected slide in March, the monthly change in the CPI in April is likely to rebound to its six-month trend. We look for the headline CPI to rise 0.2% in April, leading the year-ago rate to dip to a four-year low of 2.3%. We would not be shocked to see a 0.3% rise if some volatile components bounce back more than expected. Excluding food and energy, we forecast the core CPI to rise 0.25%, keeping the annual rate unchanged at 2.8%. Preemptive inventory building and fears of consumer pushback should keep the anticipated acceleration in consumer prices at bay until at least May. Yet beneath the surface, the subsiding trend in core services inflation will be juxtaposed with core goods inflation that is incrementally strengthening.

Sticker shock on hold

The March CPI report delivered the best of both worlds. There were few signs of tariffs igniting a widespread pickup in goods prices, while the downward trend in services inflation intensified. A repeat of March's quiescent figures will be hard to come by in April. After slipping 0.1% in March, we estimate headline CPI rebounded 0.23% last month. Core CPI similarly looks set to bounce back from what was the smallest gain in four years (0.06%) with a 0.25% increase in April.

Our expectation for a rebound in April can be traced to the drivers of March's tame reading, which centered on some of the more dynamic components of the CPI. Amid the flurry of federal government cost-cutting efforts and looming "Liberation Day" announcement of tariffs, concerns about the economy sent oil prices, airline fares and hotel prices sharply lower (Figure 1). Seasonal factors exacerbated the weakness, but seasonals will not be so friendly in April. We look for energy goods prices to be flat on the month and for travel-related services prices to decline less sharply (-0.4% in April versus -3.8% in March). Vehicle and insurance prices also look set for a rebound. Auto tariffs likely led auto dealers to hold a firmer line on pricing, while March's 0.8% decline in motor vehicle insurance prices overstated the underlying trend (Figure 2).

Download The Full Special Commentary