Takeaway: A slightly hotter than expected CPI report will keep the Fed on hold and may push officials slightly closer to considering hikes. Mortgage rates will continue to be driven mostly by oil prices and developments in Middle East peace talks in the near term.
Headline inflation remained elevated in April because of the continued spike in energy prices from the ongoing closure of the Strait of Hormuz. Core inflation was a bit hotter than expected, but the details are not quite as bad as the headline core number suggests.
- Headline CPI increased 0.6% month-over-month and 3.8% year-over-year, largely as expected. The energy shock is the main reason headline inflation has moved back up so sharply, rising from 3.3% year-over-year in March to 3.8% in April.
- Core CPI, which excludes food and energy prices, increased 0.4% month-over-month and 2.8% year-over-year, up from 0.2% monthly and 2.6% annual growth in March.
- The biggest driver was shelter inflation, which increased 0.6% month-over-month, roughly double the recent pace. This shelter spike should be interpreted with caution because it reflects the final unwind of assumptions BLS made after the October government shutdown. Those assumptions artificially lowered shelter inflation for the past six months, so in some sense this month’s shelter reading is showing two months worth of price growth.
- There is also some bleed-through from the energy shock into core inflation. Airline fares, an especially energy-sensitive category, increased 2.8% in April after already jumping in March.
- Given those special factors, the core inflation reading was probably not as bad as some investors may have feared. However, it still implies a core PCE reading later this month that is solidly above the Fed’s inflation target.
For the Fed, today’s report reinforces the case to hold rates steady for the foreseeable future.
- Recent jobs data have lowered recession risk, meaning there is little reason for the Fed to cut rates soon.
- At the same time, today’s inflation report gives the Fed no reason to lean dovish. In fact, officials may continue moving away from an “easing bias” toward a more balanced stance where the next move could plausibly be a hike or a cut.
- With Chair Powell’s term ending on Friday, the bigger question is whether incoming Chair Warsh changes the Fed’s communication strategy at the June 17 meeting.
- In the near term, mortgage rates will continue to move less with any one economic data release and more with oil prices and developments in Middle East peace negotiations, which is the underlying driver of changes in the economic data.
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