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Key takeaways

  • The April 2024 Consumer Price Index (CPI) report rose by a softer-than-expected 0.3% month-over-month (MoM) and 3.4% year-over-year (YOY).
  • Inflation eased as smaller gains in services (e.g., food services) costs offset the continued strong rises in rent and gasoline prices.
  • While the journey back to the Federal Reserve’s 2% target isn’t over just yet, progress is still being made. That could set policymakers up to deliver their first rate cut toward the end of this year.

Contributors

Cristina Dwyer

Analyst, J.P. Morgan Wealth Management

 

The April 2024 Consumer Price Index (CPI) for All Urban Consumers (CPI-U) rose by a softer-than-expected 3.4% year-over-year (YOY). This marks a deceleration from a 3.5% YoY rise in March and the first-time inflation has cooled this year. Similarly, the core CPI (excluding food and energy) also increased by less than expected, up 3.6% YoY in April, decelerating from 3.8% YoY in March.1

Over 55% of the items in the CPI basket are now running at a rate below the Federal Reserve’s 2% target. Following April’s weaker-than-anticipated jobs report, this indicates inflation is moving in the right direction and the labor market is rebalancing. However, the past three monthly CPI releases’ surprises to the upside remind us that inflation will likely take a longer and bumpier road to the Fed’s 2% target.

Breaking down the headline CPI 

April’s CPI report showed inflation eased as moderating service costs offset the continued strong rises in rent and gasoline prices. Over 70% of the month-over-month (MoM) increase for the CPI basket was driven by continued rises in the shelter and gasoline subcomponents.2

The energy index rose 1.1% MoM again and 2.6% YoY in April.3 Gasoline prices rose 2.8% MoM to drive the gain, offsetting 2.9% MoM fall in natural gas prices. Gasoline averaged $3.70 per gallon in April according to the Energy Information Administration. We expect energy to stay elevated and volatile in the near-term given looming geopolitical tensions and the approaching summer months. High energy prices could provide a headwind for consumer confidence going forward and dampen consumer spending.

The food index was unchanged MoM and rose 2.6% YoY in April, following a 0.1% MoM rise in March.4 Food at-home prices fell, led by a sharp decline in egg prices and declines in most food groups. The only increase in food-at-home prices were limited to a few subcomponents holding food price inflation relatively tame so far this year.

Food away from home prices rose 0.3% MoM and 4.1% YoY in April,5 with rises in both limited and full-service meals. However, over the past three months food away from home prices, which is a strong contributor to labor cost, has remained relatively tame, signaling that labor pressures in this segment might be abating. 

The bar chart shows the contributions of various subcomponents of the CPI index to the overall CPI index from February 2020 to April 2024.

U.S. CPI by components

 

Year-over-year percentage change

 

This chart shows the contributions of various subcomponents (Core Services, Core Goods, Food, Energy) of the CPI index to the overall CPI index from February 2020 to April 2024.

 

The chart has two lines representing the Headline CPI YoY percentage change and the Core CPI YoY percentage change (excludes Food and Energy prices from the CPI)

 

  • The Headline CPI began at 2.3% in February 2020, fell to 5.1% in May 2020 and rose to 9.1% by June 2022, its highest level since the pandemic. It then fell to 3% by June 2023 due to the Energy sector’s 1.6% MoM decline.
  • The Core CPI began at 2.4%, rose to 6.5% by March 2022, then fell to 5.9% by July 2022. It then increased to 6.6% by September 2022, the highest level since the pandemic.
  • In April 2024, Core CPI rose 3.6% YoY and headline CPI rose 3.4% YoY. Core Services rose 3.2%, Core Goods fell 0.3%, Food rose 0.3% and Energy rose 0.2%.

 

Source: Bloomberg Financial L.P. Data as of May, 15, 2024

The bar chart shows the contributions of various subcomponents of the CPI index to the overall CPI index from February 2020 to April 2024.

 

Core CPI findings

Core CPI (excluding food and energy) rose by a slightly slower pace of 0.3% MoM.6 This pushed down the YoY rise from 3.8% in March to 3.6% in April, the lowest annual rise since April 2021. Our strategists expect core inflation, a less volatile measure of inflation, to further moderate this year as high interest rates take a toll on the economic growth and labor market.

Core services inflation continued to rise and remains the stickier side of inflation which the Fed is focused on slowing. The shelter component primarily drove core services inflation in April as the shelter index, owner’s equivalent rent (OER) and rent of primary residence all rose by 0.4% MoM.7 Our strategists still expect shelter to moderate later this year as it takes longer for newly signed leases to be reflected in the shelter component.

Core goods prices fell 0.1% MoM in April, driven lower by the largest fall in used cars and trucks prices since January.8 This fall was offset by a rise for the third consecutive month in apparel prices, which rose for the third straight month.

High rents, food and energy prices continue to weaken consumer purchasing power in particular for low to medium income households. As these components remain elevated, they suggest added downside risk to the consumer spending outlook. Our strategists expect goods prices to moderate as consumer demand weakens, which would help reduce inflationary pressures.

Fed implications

While the journey back to the Fed’s 2% target isn’t over just yet, we are well on the way. That could set policymakers up to deliver their first rate cut toward the end of this year.

In the near-term, we expect the Fed to keep policy rates restrictive as more time is needed for high rates to achieve the full effect and inflation remains too high. High rates will continue to reduce consumer purchasing power throughout the year, weakening consumer demand.

The bottom line

Our strategists still expect the Fed to begin cutting interest rates at some point later in the year, as Powell expressed at the Federal Market Committee (FOMC) meeting in May. For more information on how this economic data may impact your investment strategy, consult a J.P. Morgan advisor.

References

1.

U.S. Bureau of Labor Statistics (BLS), “Consumer Price Index Summary.” (April 2024)

2.

Ibid.

3.

Ibid.

4.

Ibid.

5.

Ibid.

6.

Ibid.

7.

Ibid.

8.

Ibid.

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