Latest US inflation print eases pressure on Fed to keep hiking rates

(Alliance News) - Data from the US Bureau of Labor Statistics on Wednesday showed that US consumer prices rose in line with expectations on a monthly basis in April.

Tom Hopkins, portfolio manager at BRI Wealth Management, commented that Wednesday's print has been "highly anticipated" by markets as investors try to gauge what this reading will mean for the outlook of interest rates.

"Markets have been betting hard on there being a pause in interest rates rises over the summer months, but the Federal Reserve continues to hold that door open for more rises," he explained.

The consumer price index was 0.4% higher in April on a month-on-month seasonally adjusted basis, in line with FX Street-cited consensus, and accelerating from a 0.1% rise in March.

Annually, inflation was 4.9% before seasonal adjustment in April, down from 5.0% rate in March. Market consensus, according to FX Street, had expected 5.0% inflation again in April.

Richard Carter, head of fixed interest research at Quilter Cheviot, said that the Fed will be "breathing a sigh of relief" after the slightly lower annual inflation print.

"This should present the Fed with all it needs now to hit the pause button on the rate rises and reassess its position over the coming months. With inflation in the US now below 5% for the first time in two years, markets will be thinking the light at the end of the tunnel is getting brighter, and the worst of this inflation is far in the rear-view mirror," Carter said.

"That said," he continued, "inflation remains well above the target level, and core inflation is proving stickier. As a result, rate cuts towards the end of the year cannot be taken as a given, and much of it will depend on what the Fed does next."

Core inflation - excluding food and energy - rose 5.5% in April against the previous year, cooling slightly from a 5.6% annual rise in March. On a monthly basis, core inflation remained stable at 0.4% in April.

James Knightley, chief international economist at ING, said that another 0.4% month-on-month print for core CPI means that inflation is "still" running "far too hot" for the Fed to "relax."

"MoM CPI prints of 0.4% are well above the 0.17% MoM rate we need to average over time to bring the annual rate of inflation down to 2%, hence the Fed won’t be incentivised to sound dovish just yet," Knightley argued.

Looking forward, Knightley said that while he doesn't think that the Fed will need to see 2% annual inflation achieved before considering rate cuts, he does think it needs to be "consistently" hitting 0.2% or 0.1% month-on-month.

"If unemployment is starting to rise at the same time as 0.2% MoM core CPI prints, the Fed's dual mandate of price stability and maximum employment can justify moving interest rates lower from restrictive levels," he concluded.

By Heather Rydings, Alliance News senior economics reporter

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