Slower pace of US inflation sends Wall Street stocks to record highs

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US inflation fell to 3.4 per cent in April, in line with economists’ expectations, prompting investors to increase their bets on Federal Reserve interest rate cuts this year and sending Wall Street equities indices to record highs.

The consumer price index data released by the US labour department on Wednesday compared with March’s rate of 3.5 per cent and ended a four-month streak in which inflation outstripped expectations.

“It is something of a relief that for the first time this year, CPI did not come in higher than forecast,” said Eric Winograd, senior economist for fixed income at AllianceBernstein.

Traders in the futures market added to bets that the Fed would cut interest rates twice this year following the report.

US stocks hit record highs on the news, while government bond yields fell. The blue-chip S&P 500 reached a new intraday peak, and was trading up 1 per cent on Wednesday afternoon, while the tech-heavy Nasdaq Composite also pushed into record territory, last up 1.3 per cent.

The two-year Treasury yield, which moves with interest rate expectations, initially dropped as far as 4.71 per cent — its lowest level since early April. It later retraced some of that move to be 0.08 percentage points lower at 4.74 per cent.

The figures come a day after Fed chair Jay Powell warned that the central bank may have to maintain high interest rates for longer as it struggles to tame persistent inflation.

After Wednesday’s data, Winograd cautioned that “there is nothing in here that tells us that inflation is going to come down to the Fed’s [2 per cent] target in the near term”.

The US central bank sets its inflation target off the personal consumption expenditure index, which was most recently shown to be up 2.7 per cent in March from a year earlier.

With less than six months to go before the US election, high inflation has hit President Joe Biden’s poll ratings on the economy. Even though the annual CPI has declined sharply since hitting a peak of his presidency in 2022, many voters are still unhappy with the higher price levels for many goods.

“Today’s inflation number will be seen by some as progress and by others as a sign that inflation is still a problem. It probably is not good enough news for the Biden campaign but it could have been a lot worse,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan, whose monthly poll with the Financial Times has shown persistent dissatisfaction with inflation this year.

According to Wednesday’s figures, core consumer prices — which strip out volatile food and energy costs — rose by 3.6 per cent last month compared with last year. This marked the lowest rate since April 2021.

On a monthly basis, the core consumer price index rose by 0.3 per cent in April, compared with increases of 0.4 per cent during the previous three months.

Ryan Sweet, US economist at Oxford Economics, called the data “a very small step in [the] right direction” though “we would need to string together two or three more months of this before you start to hear the Fed sound more confident”.

In the April data, shelter inflation remained high at 5.5 per cent on an annual basis — while monthly increases were steady at 0.4 per cent — as housing costs continued to be one of the main drivers of inflation. But monthly price gains in transportation services and medical care eased, while they remained steady in energy. Food prices were flat on a monthly basis and up 2.2 per cent over the past year.

The slightly cooler inflation data follows labour market data for April that showed a slowdown in job creation — which will also give the Fed more confidence that the US economy is not experiencing a new acceleration.

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