Even with price pressures mounting in April, the latest data provided some evidence of a cooling in inflation.
WASHINGTON – US consumer prices rose again in April and measures of underlying inflation remained elevated, suggesting that further declines in inflation are likely to be slow and erratic.
Prices rose 0.4% from March to April, the government said on Wednesday, up sharply from the 0.1% recorded from February to March. Year-on-year, prices increased 4.9%, down slightly from the year-over-year increase in March. It was the smallest annual increase in two years.
Even with price pressures mounting in April, the latest data provided some evidence of a cooling in inflation. Food prices fell for the second consecutive month. And the cost of many services, including airfares and hotel rooms, has plummeted. Although apartment rents rose in April, they did so more slowly than in previous months.
Federal Reserve policy makers have been watching utility prices closely, and April’s figures could lead them to do what they signaled after their meeting last week: hold off their rate hikes, after 10 consecutive hikes, as they assess the economic impact that higher borrowing costs had.
Measured year-over-year, last month’s drop in inflation was much smaller than in previous months, underscoring that consumer price hikes may not return to the Fed’s 2% target until at least next year.
Excluding the volatility of energy and food costs, the so-called core prices increased by 0.4% from March to April, as from February to March. It was the fifth month in a row that they’ve risen by at least 0.4%. Core prices are considered a reliable indicator of long-term inflation trends. Compared to a year ago, core inflation rose 5.5%, just below a year-over-year increase of 5.6% in March.
“This is a story of core inflation still sticky at a high level,” said Blerina Uruci, chief U.S. fixed income economist at T. Rowe Price. “This report puts the Fed on track to keep rates high this year.”
For everyday consumer goods, Wednesday’s inflation report was mixed. Gasoline prices rose 3% in April alone. Conversely, food prices fell for the second consecutive month. Used car prices rose 4.4% after nine months of decline.
Airfares, however, fell 2.6% in April and hotel prices tumbled 3% after four straight monthly hikes.
The Fed is paying particular attention to a measure of services inflation that covers things like restaurants, hotel stays and entertainment and which has remained chronically high for much of the past year. This measure, which excludes energy services and housing, increased by just 0.1% from March to April, the smallest increase since last July.
Consumers and businesses continue to struggle with rising costs, and there are signs some are responding by limiting spending.
Donald Minerva, owner of Scottadito Osteria Toscana, an Italian restaurant in Brooklyn, says he’s had to raise prices several times since the pandemic hit to keep up with rising costs of raw materials, all kinds of insurance and higher wages.
Minerva has been trying to find ways to save costs. She has stopped serving lunch during the week and is closed Mondays and Tuesdays. Even with reduced hours, however, his labor costs are about 10% higher than before the pandemic.
With consumers starting to resist higher prices, Minerva said, he’s been forced to abandon pricey menus for holidays like Valentine’s Day and Mother’s Day. He introduced a pricier prix fixe menu for New Years, only to see some customers cancel.
“People don’t spend that much money,” he said. For the New Year’s Eve dinner “we did what we normally did and lost the holiday”.
“Consumers don’t have an unlimited ability to keep spending at these price levels,” said Thomas Simons, an economist at Jefferies, the investment bank. “This will lead to a budget review and a reduction in consumption in the future.”
A slowdown in consumer spending, which drives most of the US economy, could help ease inflation in the coming months. At the same time, average salaries are still rising rapidly. While beneficial to workers, this trend likely means many companies will continue to raise prices to offset their higher labor costs.
And some companies are still experiencing strong consumer spending. Delaware North, which operates food and beverage services at resorts, sports stadiums and national parks across the United States and abroad, still enjoys good demand at destination resorts in places like the Grand Canyon.
“They’re demonstrating this incredible resilience,” said Frank Mendicino, the company’s executive vice president. “People travel to these must-see destinations like the Grand Canyon.”
Mendicino acknowledged that the company raised prices for some of its hotel rooms primarily in response to increased demand, not because of higher labor costs.
For more than two years, high inflation has been a significant burden on American consumers, a threat to the economy, and a frustrating challenge for the Fed. The central bank raised its key interest rate by as much as 5 percentage points percentages since March 2022 to try to bring inflation back to its 2% target.
In addition to making borrowing much more expensive for consumers and businesses, these higher rates have contributed to the collapse of three major banks in the past two months and a probable drop in bank lending. The result could be a further weakening of the economy.
More ominously still, the government’s debt ceiling could be breached in early June, and Republicans in Congress refuse to raise the ceiling unless President Joe Biden and Congressional Democrats agree to big spending cuts. If the debt ceiling is not raised in time, the nation would default on its debt, a scenario that could trigger a global economic crisis.