Inflation cooled slightly last month, signaling that while previously anticipated cuts to interest rates in the first half of the year are unlikely, there is still hope for decreases this fall.
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The consumer price index rose 3.4% year-over-year in April, according to the Bureau of Labor Statistics’ Wednesday report, down from a 3.5% increase in March. Month-over-month price increases also ticked down, rising 0.3% in April, a slight reduction from 0.4% in March.
The Federal Reserve has held interest rates between 5.25% and 5.5%, since last July after hiking them 11 times to cool inflation. Its goal is to bring inflation down to 2%, but Wednesday's numbers signal the worst bout of inflation in four decades is still stubbornly resisting that target.
Meanwhile, core inflation provided a more positive outlook, cooling for the first time in six months. That measure, which strips out more volatile prices like those for food and energy, rose 3.6% year-over-year, up only 0.3% from the month prior. The metric had maintained 0.4% increases for the first three months of the year.
The increase in overall inflation was driven by housing costs and gasoline, which together accounted for more than 70% of price increases. Shelter costs were up 5.5% in April from a year prior and continued a streak of ticking up 0.4% month-over-month.
Inflation was unexpectedly high for the first three months of the year, dampening hopes that the Fed would start to lower rates in the first half of the year.
“We did not expect this to be a smooth road, but these were higher than I think anybody expected,” Federal Reserve Chairman Jerome Powell said on a panel discussion in Amsterdam Tuesday.
But he said he is confident that with patience, the interest rate pressure will eventually force inflation down to the goal. He also said it is unlikely the Fed’s next move would be an interest rate increase.
Economist Julia Coronado said Wednesday morning in a social media post that the inflation reading is “not decisive” for the Fed, but “the next move in rates is clearly down.”
Bank of America Securities U.S. economist Stephen Juneau told Yahoo Finance he sees it as a “step in the right direction,” but it isn't enough for the Fed to get excited about rate cuts yet.
Nationwide Chief Economist Kathy Bostjancic told The Associated Press the inflation data “keeps alive the prospect of the Fed cutting rates in September.” She said that prospect is also supported by retail sales data released Wednesday that showed spending remained flat in April after rising the prior month.
High interest rates have put pressure on commercial real estate owners and developers, slashing property valuations and making it difficult for borrowers to refinance their loans or sell properties. The industry had hoped rates would start to come down in the first half of this year to help rescue struggling deals.
“CRE was initially hoping for a quick easing cycle, which would buy investors time to regroup and restructure and hopefully face lower rates once loans roll over or investors consider selling,” economist Derek Tang told Bisnow last month. “Instead, high inflation means the Fed will keep interest rates higher than otherwise, depressing valuations now and reducing hope that there is quick relief.”
The stock market was bullish following Wednesday's inflation news. The S&P 500 was up 0.7% at 11 a.m. Wednesday. Stocks for all REITs were up more than 1.2% just over an hour after the markets opened.
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