A measure of inflation largely met expectations and declined in April for the first time in six months, a small step in the right direction for the Federal Reserve officials looking to start cutting interest rates this year.
The core CPI—which excludes food and energy costs—climbed 0.3% from March, snapping a streak of three above forecast readings which spurred concern that inflation was becoming more entrenched. The year-over-year measure rose at the slowest pace in three years.
The largest component of the CPI, which is owners’ equivalent rent climbed 0.4% for a third month, a variable that has caught the Central Bank by surprise. For several years, forecasters have misjudged this incessant rise in OER.
An argument has been made that until OER declines, the CPI will remain above 3%. As widely acknowledged, the Committee has a 2% inflation speed limit. Year over year headline and core inflation rose by 3.4% and 3.6%, respectively.
The market is now suggesting a 60% chance the overnight rate will be reduced by 0.25% in September and perhaps two reductions by year’s end.
Minneapolis Federal President Neel Kashkari repeated yesterday the central bank likely needs to keep rates at the current level for a “while longer,” noting the inflationary impact of housing.
Markets responded favorably to the data as yields fell across the Treasury spectrum and equities added about 1%.
Last night the foreign markets were mixed. London was down 0.23%, Paris down 0.43% and Frankfurt down 019%. China was up 0.08%, Japan up 1.39% and Hang Seng up 1.59%.
Futures are flat. The 10-year is up 1/32 to yield 4.34%.
Kent Engelke
Chief Economic Strategist Managing Director
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