The rate of inflation in the United States slowed to its lowest rate in two years in April, indicating the Federal Reserve’s efforts to lower prices by hiking interest rates might be starting to work.
The Consumer Price Index (CPI), which measures the cost of a basket of goods, rose 0.4% in April and 4.9% over the last 12 months, but this was a deceleration from 5% the month before. The latest CPI read suggests prices are rising at the slowest rate since April 2021.
Analysts widely expected the figure to remain at 5%, so the lower figure will come as a relief to the Federal Reserve. The central bank has been hiking interest rates over the last year in an attempt to curb rising prices.
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What is driving inflation in the US?
The cost of housing also. Housing costs - the largest contributor to the headline figure - increased 0.4% following a 0.6% increase in March. Meanwhile, the energy index rose 0.6% in April, mostly due to an increase in the cost of petrol.
But the rate of inflation was driven down by falling airline fares, which dropped 2.6% over the month. Lower prices for new cars also helped pull down the headline number.
The rate of inflation peaked at 9.1% in the US last June, its highest level since 1981. Though it has since fallen steadily, it remains significantly above the Fed’s 2% target.
What does US inflation mean for interest rates?
Last week the Fed raised its key rate by 0.25%, taking it to a range of 5% to 5.25% – its highest level since 2007.
This marked the tenth consecutive increase in over a year, but Federal Reserve chair Jerome Powell indicated the Bank might be getting “closer” to stopping the rate hikes.
“The consensus is that the Fed's latest rate hike was certainly its last for this cycle, and the Fed will cut the rates by 75bp before the year ends,” says Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
But a rate cut can’t be taken for granted just yet as inflation is still twice the Fed target rate.
On the other hand, the turmoil in the US banking sector “is tightening credit conditions and helping the Fed to do its job – restrict credit in a way to slow growth and ease inflation,” says Ozkardeskaya.
But core inflation is proving stickier, having stayed at 5.5% since the end of last year. “As a result, rate cuts towards the end of the year cannot be taken as a given, and much of it will depend on what the Fed does next,” says Richard Carter, head of fixed interest research at Quilter Cheviot.
“It will be hoping that the latest interest rate rise is enough and that this feeds into the economy in the next couple of months… The Fed will be keeping a close eye on events and as has been proven over the course of the last three years, nothing can be taken for granted. In the immediate term, a pause now seems on the cards, but beyond that remains as volatile as ever.”
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