Consumer Price Index (CPI) Report for April 2024

May 15, 2024


After a series of upside inflation surprises this year, inflation simply meeting expectations—though still-lofty ones—was enough to allow markets to breathe a sigh of relief.

Key Stats

Headline inflation advanced +0.30% in April, easing from the +0.40% increases in February and March, which took the annual inflation rate down to 3.4% from 3.5% previously. Core inflation, excluding food & energy, was +0.3% and in line with expectations, taking the annual inflation rate down to 3.6% from 3.8% previously, notably marking the slowest pace of inflation since April 2021. As we discuss in more detail on the following page, housing costs and auto insurance rates alone continue to drive the bulk of inflationary pressures. Goods prices like cars, household furnishings, recreation, and education continue to fall year-over-year, leaving the service sector as the sole source of inflation. On that front, there was some good news as well with airfares falling and vehicle maintenance costs flat.

Impact on the Fed

Policymakers at the Fed had already signaled that recent disappointments on the inflation front were likely to delay any rate cut plans. However, Fed Chair Powell—as recently as yesterday—has been keen to drive home the idea that the likelihood of further rate hikes remains remote. This inflation report was certainly Fed-friendly and should support the idea that—though delayed—modest rate cuts are still more likely than not. At the March meeting, policymakers were already split between two and three rate cuts this year. Though we suspect that bias has shifted towards two in the months since, today’s report shouldn’t have much impact on the Fed’s thinking and Fed communications—this was a small step in the right direction and policymakers should ultimately remain patient and data dependent in judging the next steps, in our view.

Market Reaction

Markets—and the Fed—have long-known that the path back to price stability would be a bumpy one. Throughout the global inflation wave of the past two years, markets have at times been more sensitive to inflation surprises rather than inflation itself. That has certainly been the case this year as Treasury yields have risen sharply after recent CPI reports which have missed expectations. Today’s market reaction to largely-as-expected report reflects that idea. Markets hate surprises, so while inflation does remain elevated, the idea that economists still have a grip on the underlying dynamics appears good enough, sparking a rally in both risk assets and bond prices.

And nowhere is that more evident than in equity markets, where the S&P 500 broke out this morning to a fresh record high of ~5,290 and is now up nearly 12% year-to-date. Markets are fully priced for a first rate cut in September, while seeing a 97% chance that a second rate cut could follow this year, likely at the Fed’s December meeting. Treasury yields are lower across the curve with the benchmark 10-year Treasury note yield down 7 basis points to 4.35%, well below the 2024 peak level of 4.70% on April 25.

Inflation Outlook

More good news could be on the horizon. As we discuss on the following page, the fewest small businesses in about a year are planning to raise prices in the months ahead. Energy prices have been rising since last December, with oil moving from $69 to a peak of $87 in April. However, over the past month oil prices are down 10% and gas prices are down about 10 cents which should show up in the May inflation data. The Cleveland Fed’s inflation tracking model currently suggests May headline inflation will be just +0.10% m/m, down from +0.30% reported today for April.

The Fed, and markets, will get the next CPI report just ahead of its key June 11-12 meeting. While policymakers almost certainly won’t have gained the ‘greater confidence’ needed that inflation remains on the road back to 2% by then, they could have a pair of encouraging inflation reports in hand as they potentially begin to lay the groundwork for modest policy rate recalibration plans later this year.


Report Provided by RBC Wealth Management