Tariffs, what tariffs? CPI surprises to the downside

The US CPI report for April surprised on the downside. The headline CPI rate rose by 2.3% YoY, down a notch from the 2.4% expected. The core rate was steady at 2.8%. Monthly gains were also weaker than expected, rising by 0.2% MoM in April. This is stronger than the -0.1%  monthly gain for March, but it is still a moderate increase and suggests that tariff related price pressure is not showing up in the economic data as yet.

The key driver for inflation in the US last month was not tariffs, but shelter, which accounted for half of the increase in the index. Energy prices pushed up inflation last month, although that has fallen and should add as a downward pressure on inflation in May. Food prices fell last month, along with airfares, used cars and trucks. Household furnishings, education and health are costs rose last month.

Where are the tariff related price increases?

Tariffs have so far not shown up as a big driver of inflation last month because retailers may be selling inventory that they pre ordered to try and front run tariffs. So far, there is nothing in the inflation data to suggest that consumer demand weakened during the peak of global trade tensions in the US. The food away from home index increased by a robust 0.4% MoM in April, and super core inflation is rising at a 3.6% annual rate, which is driven by shelter prices. This is one part of the index that is unlikely to be touched by tariffs, suggesting that elements of US core inflation remains sticky even without the impact of inflation.  

This data suggests that the US economy was in good shape in April, that tariffs are not showing up in the inflation data yet, and that demand for services remains strong, which is why service providers can raise their prices at the rates we have become used to in recent years.

Tech leads US futures higher after CPI

The market reaction to this news has been positive for stocks. US equity prices have switched from negative to mildly higher. In the pre-market, Nvidia is trading higher by more than 1%, Tesla is higher by 0.9%, Amazon by 1.4%, while Apple is bucking the trend and is mildly lower. This suggests that there could be more upside in the short term for US equities. European equities are also in the green as we move through Tuesday. The Fed Fund Futures market has barely budged, with just 2 rate cuts priced in for this year. There was a marginal increase in expectations for a September rate cut to 65% from 63% chance. US Treasury yields are extending their decline, and the 2-year yield is lower by nearly 4 bps on Tuesday, while the dollar is mostly stable.