The Consumer Price Index (CPI) for April showed that headline inflation continues to moderate, dipping below 5% for the first time since April 2021. Headline CPI is now below the Fed funds rate, reducing the need for additional Federal Reserve (Fed) tightening. However, annual core inflation failed to show clear deceleration, sitting at 5.5%—a level it’s hovered around since the start of the year.

Inflation remains too elevated, and the deceleration is proving slow. Yet, after the strong April jobs report, the Fed will be comforted by the fact inflation has not increased. Today’s CPI number likely reinforces the Fed’s policy slant toward a rate hiking pause.

Consumer Price Index
Year-over-year % change, 2010–present

Year-over-year percent change in Consumer Price Index, 2010 to Present

Source: Bureau of Labor Statistics, Principal Asset Management. Data as of May 10, 2023.

Report details:

  • Headline CPI rose 0.4% month-over-month in April. While this was a meaningful pick-up from the 0.1% increase last month, the increase was mainly driven by a rise in energy prices and was firmly in line with consensus expectations. Annual headline CPI eased from 5.0% to 4.9% in April.
  • Core CPI (which excludes food and energy prices) rose 0.4% month-over-month, also in line with expectations, while the annual rate ticked down slightly from 5.6% to 5.5%. Annual core inflation has been hovering at 5.5%-5.6% since the start of the year, and has shown minimal improvement.
  • Within core CPI, core goods inflation rose to 0.3%—the fastest monthly gain since last August, driven by a sharp increase in used car prices. Low inventory levels and strong demand suggest that used car prices will continue to see upward pressure over the coming months.
  • Core services inflation eased slightly from 0.5% to 0.4%. Housing costs were once again the key contributor, with owner expected rents and shelter inflation rising 0.5% and 0.6% respectively. While the Fed shares the widely held expectation that rent inflation will slowly abate as new leases are signed at more favorable prices, the deceleration is taking longer to materialize than expected.
  • Core services ex-housing, the main focus of the Fed due to its link to the labor market, eased to 0.11% month-on-month in April, the lowest since last July. While the Fed will certainly welcome this number, the annual rate and broad trend remain elevated, so they will need to see more proof of deceleration before they are convinced of a meaningful decline.


Today’s inflation report applies little pressure on the Fed to hike again next month and, indeed, markets are now only pricing in a very small probability of a June increase. There is a tentative deceleration in the important core services ex-housing figure, likely justifying a wait-and-see approach from the Fed.

Nonetheless, price pressures remain too elevated to justify current market expectations for rate cuts later this year. For rate cuts to come into play, the Fed will need to see a significant deterioration in the labor market which, in turn, weighs heavily on price pressures, or a spiraling banking crisis which puts financial stability at the forefront of the Fed’s focus. Neither scenario is on the board yet.


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