Stocks jumped after the April Consumer Price Index (CPI) showed that inflation cooled moderately last month, with prices rising by less than 5% on an annual basis for the first time in two years. Two of the three major benchmarks lost steam as Wednesday's session progressed, however, as the implications of the CPI report sunk in.
Ultimately, the major market benchmarks ended with a mixed close.
Although the inflation rate came in below economists' expectations – and gave the Federal Reserve room to pause its campaign of interest rate hikes at the next Fed meeting – it also dashed hopes for a rate cut coming anytime soon.
The Consumer Price Index (CPI) for April rose 4.9% year-over-year, vs March's gain of 5%, the Bureau of Labor Statistics said Wednesday. The Federal Reserve Bank of Cleveland's "Nowcast" forecast annual inflation to increase by 5.2%. On a monthly basis, the CPI increased by 0.4% compared with March's gain of 0.1%. Economists expected monthly CPI to rise 0.6%.
Perhaps most important, core CPI, which excludes volatile food and energy prices, also came in lower than expected. Stubbornly elevated core inflation has contributed to the Fed's reluctance to stop raising interest rates. On an annual basis, core CPI rose 5.5% in April, vs estimates for a gain of 5.6%. March's year-over-year core CPI reading also came in at 5.6%.
Monthly core CPI rose 0.4% in April. Although that was the same rate of inflation seen in March, it did come in below forecasts for a 0.5% increase month-to-month.
Fed Chair Jerome Powell and the central bank's rate-setting group, known as the Federal Open Market Committee (FOMC), are open to what is being called a "hawkish pause" when it next meets in June. However, Powell has emphasized that future rate decisions will be "data dependent."
Although there will be another CPI report to digest before the FOMC's June policy decision – as well as plenty of other economic data, including the Fed's preferred inflation gauge known as the Personal Consumption Expenditures Price Index (PCE) – experts mostly agree that the April CPI report helps the case for the FOMC to pause its campaign of interest rate hikes.
That said, experts also largely agree that the CPI report doesn't support a Fed pivot toward looser monetary policy in the nearer term.
"The likelihood of a rate cut later this year is becoming more of a fantasy," says Sean Snaith, director of the University of Central Florida's Institute for Economic Forecasting. "Inflation is only slowly melting away while the labor market remains tight with significant pressure on wages, pushing us in the opposite direction of what the Fed is trying to achieve with interest rate hikes."
At the closing bell, the blue-chip Dow Jones Industrial Average slipped 0.1% to finish at 33,531, while the broader S&P 500 added 0.5% to end at 4,137. The tech-heavy Nasdaq Composite rose 1% to close at 12,306.
Which goods and services are driving inflation?
Although inflation continues to ease, prices are still rising at a pace not seen in decades. Indeed, inflation is forecast to run at about 5% for all of 2023.
Excluding the last couple of years of pandemic-induced price spikes, that would be the worst bout of inflation since 1989 and 1990. Note that over the first two decades of the 21st century, annual inflation in the U.S. averaged just 2.1%. (The Fed's inflation target is 2%.)
The fact remains that most goods and services are much more expensive than they were a year ago. To get a sense of what's driving inflation, have a look at which categories are suffering the worst cases of rising prices.
