Signs of Cooling Are Everywhere in the Economy. It Isn’t Just CPI.

The latest round of economic data has revived hope that the Federal Reserve will begin implementing interest rate cuts this fall as inflation declines and growth weakens.

After three months of stronger than expected inflation readings, Consumer price index report for April, released on Wednesday, provided evidence that price pressures are easing again. Other recent economic data, from retail sales figures to the labor market, point in the same direction.

Headline inflation was 3.4%, a slight deceleration from the annual rate of 3.5% in March. Perhaps most importantly, the pace of monthly inflation slowed to 0.3%. That was slower than economists had expected and a welcome moderation from 0.4% in March.

The core CPI, which excludes more volatile food and energy prices, rose 3.6% year-on-year, a marked slowdown from the 3.8% rate recorded in March. The monthly pace of core inflation was also 0.3%, in line with expectations and slower than the 0.4% rate in March.

While inflation remains very high, the latest data provided evidence that the first quarter reports were more than just a signal that inflation is taking off again. “There has been a lot of lies around today’s CPI reading to prove that the decline in inflation has simply lagged over the past three months and not derailed,” wrote Alexandra Wilson Elizondo, co-head of investment for the multi-asset solutions business at Goldman Sachs Asset Management.

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These numbers are good news for Federal Reserve officials looking for confirmation that inflation is heading back toward the central bank’s 2% target. But one month of good data is not a clear signal that price gains are actually slowing down. Continued progress will likely depend on further slowing of the US economy and consumer demand.

Fortunately, there are early indicators that it may be afoot. It was released to coincide with the first positive CPI report in four months Retail sales data for April He pointed to a slowdown in consumer spending as well. Total retail sales for April were flat compared to March, while economists expected growth of 0.4%.

“A weaker-than-expected April retail sales report suggests that US consumers are acting more cautiously as labor market conditions ease and prices remain persistently high,” wrote Lydia Boussour, chief economist at EY.

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So-called control group retail sales — a measure that excludes revenue from auto dealers, building materials retailers, gas stations, office supply stores, mobile home sellers and tobacco stores — fell 0.3% last month after jumping 1.1% in March. . . Like core inflation, the control group measure is a more accurate measure of consumer spending and is used as part of calculating total U.S. consumption as part of GDP growth.

Consumer spending represents about 70% of the United States’ gross domestic product. The April sales report also included downward revisions to previous months’ numbers, reinforcing the idea that consumer spending is losing steam.

“The moderation in the CPI in April is welcome after a string of higher readings in the first quarter and keeps alive the possibility that the Fed will start cutting interest rates in September,” wrote Kathy Posjancic, chief economist at Nationwide. “Weak retail sales in April provide further support for interest rate cuts in September.”

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What further slows the economy, of course, is the fact that the initial estimate for GDP growth of 1.6% in the first quarter was also weaker than expected. The April jobs report showed that fewer jobs were created than in March.

The labor market is worth watching, wrote Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute. If wage growth fades more quickly than inflation declines, there will be increasing pressures on consumer spending. “This combination would slow the economy and inflation enough for the Fed to start cutting interest rates later this year,” Christopher said.

The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditures Price Index, may provide another positive signal. Based on Tuesday’s Consumer Price Index and Producer Price Index, economists said…


Bank of America estimates that core PCE inflation rose 0.2% in April, compared to 0.3% in March.

“Although annual inflation has not yet reached 2%, we suspect that this slowdown in April and similar modest easing in May and June will serve as an encouraging signal to Fed officials that inflation is strengthening,” Citi’s Veronica Clark wrote. “It will not happen again in the first quarter.” The Bureau of Economic Analysis will release its April personal consumption expenditures index on May 31.

However, as Fed officials note, the road back to 2% inflation is likely to be bumpy. If inflation rises over the summer, that could prompt Fed officials to leave interest rates unchanged and give their current restrictive monetary policy more time to work. Federal Reserve Chairman Jerome Powell confirmed on Tuesday that the Fed is unlikely to raise interest rates at this point.

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However, if price growth continues to slow and the US economy steadily returns to normal, that will provide economists, Fed watchers and investors some confidence that the bank is likely to have enough positive inflation data to start cutting interest rates this year. This would be positive for economic growth, homebuyers and corporate profits

Standard & Poor’s 500.

Write to Megan Leonhardt at megan.leonhardt@barrons.com

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