Inflation with a 4 Handle

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, May 10, 2023


  • The monthly consumer inflation rate rose 0.4% in April from 0.1% the previous month, enough to push the annual rate of inflation down to the lowest since mid-2021.
  • Shelter costs continue to be the largest contributor to inflation, illustrating the acute pain felt by renters in this country. This component will not likely be a significant driver of inflation by the end of this year as more multi-family units come to market.
  • Airline prices in April declined month-to-month but are still higher than earlier this year as consumers release pent-up demand for travel.
  • New vehicle prices declined month-to-month for the first time in 12 months as auto dealers work to jumpstart stalled auto sales.
  • Bottom Line: April inflation metrics all but confirm expectations that the Federal Reserve (Fed) will not hike rates next month. The Fed could even justify outright rate cuts in coming months as inflation and the economy slow further. Risk assets will likely become more attractive as investors digest this latest inflation report.

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Markets Believe Inflation Moving in Right Direction

As inflation moves in the right direction, investors are right to believe that the Federal Open Market Committee (FOMC) will keep rates unchanged in the upcoming meeting in June. Headline inflation is showing consistent signs of easing but it could take a while for the inflation rate to hit the Fed’s target because services prices may take longer to materially cool down. Rent prices, for example, rose 0.56% in April, hotter than the average monthly rise before the pandemic but lower than last year’s rate. As more multi-family units come to market, we expect rent prices to cool further. According to Apartmentlist, an online apartment advertisement firm, a combination of softer demand and rising supply is “keeping rent growth in check.”[1]


The Inflation Dashboard below provides a broad snapshot of the inflationary environment.

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Shelter Coming Off the Highs

The annual rate of rent inflation eased slightly in April from the high in March. We may likely see rent prices ease further throughout the year. Strong multi-family construction activity is clearly a good sign that rent costs will eventually ease. The growth in condo and apartment construction means the supply of multi-family units will increase this year as more projects come to market. Industry data already shows declining rent prices, so it’s just a matter of time before the official government statistics reflect that easing. Investors and policy makers alike should expect a softening in housing-related inflation in the coming months.

Food Gets Slightly More Affordable

Overall, the food index remained stable in April. Grocery prices outright declined in April and in March as four of the six major grocery store food group indexes decreased in April. Both the index for fruits and vegetables and the index for meats, poultry, fish, and eggs declined, with drops of 0.5% and 0.3%, respectively. The dairy and related products index also decreased by 0.7%, driven in large part by the milk index’s decline of 2%, the largest decline seen since February 2015. Declining food prices will help the lower income households most sensitive to consumer staples.

What Does It Mean for You?

The outlook for inflation the rest of the year looks promising. The Fed seems to be shifting to a “wait and see” strategy as the banking sector is tenuous and consumers are slowing spending activity. Further, the banking failure of Silicon Valley Bank seems to be contained and the general financial system appears stable. We expect the Fed to keep the target rate unchanged at the next meeting as economic conditions weaken. As inflation convincingly cools closer to the long-run target of 2%, investors will likely take on more risk for their portfolios.


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