CPI came in higher than expected in April, But CPI inflation is finally starting to ease back from its highest level in 40 years. Stocks were initially volatile in the wake of the inflation report, but the Dow and other major indexes quickly turned decisively lower on Wednesday. stock market work.
The Labor Department said its consumer price index rose 0.3% from the previous month and 8.3% from a year ago, down from the 8.5% inflation rate in March. Core CPI, which strips out volatile food and energy categories, rose 0.6% from March. The annual core inflation rate fell to 6.2% from the previous month’s reading of 6.5%, which was the highest since August 1982.
Economists expected the overall CPI to rise 0.2% in the month as the annual CPI inflation rate fell to 8.1%. Core CPI saw an increase of 0.4% compared to February and 6% more than a year ago.
Bigger-than-expected price increases in April reflected strength in housing and medical costs. Services inflation was 5.4%, the highest since May 1991.
The low rate of inflation in April reflects the large price increases that occurred in April 2021 that retracted from the 12-month price change. Price pressures may also ease as demand slows, at least in some categories.
In a separate release on Wednesday, Adobe’s digital price index fell 0.5% during the month, as the annual online inflation rate eased to 2.9% from 3.6%. Adobe noted that 10 of the 18 categories experienced monthly price drops.
A monthly rise in core CPI of 0.6%, if continued, would add up to 7.2% annual core inflation. This compares with the Fed’s forecast of 4.1% core inflation in 2022. If inflation continues to exceed the Fed’s projected levels, policy makers will likely have to tighten more and faster than anticipated.
Keep in mind that the CPI is different from the Fed’s preferred PCE price index. The latter includes government purchases on behalf of consumers such as Medicare and Medicaid. They also lead to the substitution effect, when higher prices cause consumers to adapt buying behaviour.
Dow Jones, Treasury yields reaction to CPI inflation
The Dow Jones Industrial Average made big moves before and after the open, including strong gains at one point. But the major indices sold out heavily, all posting 52-week lows. Shortly before the close, the Dow was down 1%, the S&P 500 was down 1.6% and the Nasdaq was down 3.2%.
The Russian invasion of Ukraine threw gas on the problem of inflation in the United States and around the world, leading to sell-offs. But lately the markets have been selling on fears that the Federal Reserve will tighten further, pushing the economy into recession and the Dow Jones index entering bear market territory.
As of Tuesday’s close, the Dow was down 12.6% from its record closing high on Jan. 4. The S&P 500 is down 16.6% from its peak, while the Nasdaq Composite is down 26.9%.
It remains to be seen if inflation that has started to decline from its peak can create a sustained rally. Be sure to read IBD’s The Big Picture A column after each trading day for the latest stock market trend news and what it means for your trading decisions.
After the CPI report, the 10-year Treasury yield initially moved above 3%, but then fell 7 basis points to 2.92%, possibly due to economic growth concerns. The two-year Treasury yield, which is closely related to the Fed’s rate hike decisions, rose 2 basis points to 2.64%.
CPI Inflation Report Details
Prices of used cars and trucks fell 0.4% during the month, and were up 22.7% from a year ago. However, that compares with March’s annual gain of 35.3%.
Demand for used cars got a boost amid a global chip shortage that has hampered production of new cars. New car prices jumped 1.1% during the month, while they were up 13.2% from a year ago. This is the largest annual increase since 1949.
Energy prices fell 2.7% during the month and increased 30.3% from a year ago. Gasoline prices have recorded new highs in recent days.
Food prices outside the home rose 0.6% in April versus March, while they were up 7.2% from a year ago. Prices of food consumed at home rose 1% last month and 10.8% from a year ago.
Prices for medical services rose 0.5% month over month, bringing the annual increase to 3.5%, the largest since October 2020.
Meanwhile, home prices rose 0.5% in April, as owners’ equivalent rents rose 0.6%. Shelter costs are up 5.1% from a year ago, while owners’ equivalent rent is up 4.8%. Both are the highest since 1991.
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