Inflation rates, which constituted the most complicated criterion after the Fed meeting and whose course became more uncertain due to the supply/demand balances in the recent period, still point to a mixed picture. In the US, CPI increased by 0.3% on a headline basis and 0.6% on a core basis in April, while annual headline and core inflation realized as 8.3% and 6.2%, respectively. A partial retracement was expected from the summit, but incoming data shows that inflationary pressures are stronger than expected and the easing in the rate of price increase is at a more moderate rate. Of course, wage inflation also increases at this stage and affects the demand axis.
If we look at the sub-items; The biggest contribution to the increase in all seasonally adjusted items was the increases in the indexes of housing, food, airfare and new vehicles. The food index rose 0.9% during the month. The energy index slumped in April after rising in recent months. Gasoline index fell 6.1% during the month, offsetting increases in natural gas and electricity indices. The most decisive effect here, of course, will be the impact of the Russian crisis and the course of the war on global supply, so there are high price risks in supply gaps. Energy prices tumbled from their peak amid China's sharp slowdown, causing headline inflation to rise more slowly than core, but that could be a temporary break as oil prices rise again as Europe approaches an embargo on Russian oil.
The index for all items excluding food and energy rose 0.6% in April after increasing 0.3% in March. Indices for housing, airline fares, and new vehicles, as well as indices for medical care, leisure and household goods and operations, all increased in April. Apparel, communications, used car and truck indices fell during the month. Despite the decline in gasoline and the energy index, the airline fares index continued to rise sharply, rising 18.6% in April, the largest monthly increase since the series began in 1963. The new vehicle index rose 1.1% in April after rising 0.2% in March. The entertainment index rose 0.4% in April after gaining 0.2% in March.
The clothing index fell 0.8% during the month, ending a series of six consecutive gains. The used car and truck index also fell 0.4% for the month, making its third consecutive decline after a long series of increases.
Comparison of US core goods and services inflation Source: Bloomberg
Powell warned that there was only a one-month improvement in core inflation, so it would be prudent to be cautious about the April drop in inflation. As the demand for durable goods, reinforced by the pandemic, started to decline steadily, the weight of goods inflation seems to be decreasing in the CPI. The effect here seems to have left its place to strong services inflation. With the ease of pandemic conditions and the withdrawal of paychecks, there will be a moderation in prices of core goods, especially vehicles, as demand shifts to services. There will be fewer delays for basic needs in the coming months; Food prices are still rising and geopolitical risks will remain an upside risk to energy costs this summer.
Renewed supply cuts, including the war with Russia and curfews in China, are not a quick respite in terms of low prices. The hawkish comments will remain valid as the Fed's efforts to cool down demand. Peak inflation may have passed, but the decline from its 40-year high will be slow. Therefore, within the framework of the distance of inflation from the target level, the Fed will stick to 50 bps rate hikes in this environment. Of course, there may be a shift to 75 or 25 bps rates depending on the Fed's core inflation situation. This direction of the data will definitely not pull the Fed back from the 50 bps scale.
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