Inflation is Cooling

The Bureau of Labor Statistics reported this morning that consumer prices rose 3.4% year over year in April. This is the first time since October of last year that the actual reading has been below estimates.

In 2023, the stock market was a slave to inflation and the commensurate rate-cut story. Fewer cuts were bad, and more were good. And then that relationship broke.

The rate cut story fizzled earlier this year as data suggested that lower interest rates were inappropriate given the economy's strength. Recently, however, the market didn’t care that it might not get the cuts it so desperately hoped for in ‘23. All year stocks have been rising despite inflation coming in hotter than expected, which pushed back expected interest rate cuts. If you’re still looking for hotter inflation and higher rates to hurt the market, you’re using a playbook that stopped working a while ago.

While inflation is cooling, prices are still 3.4% higher than they were a year ago. And prices a year ago were 4.9% higher than the year before that. Prices are 21% higher than they were before the pandemic started. And of course, some are up a lot more than that. Economists might be pleased with today’s report, but few people are happy with the prices they see in everyday life.

The pace of price increases is moderating, but the problem is that it’s doing so at 3%. Getting down to the Fed’s target of 2% is proving to be challenging. Over half of CPI components by weight are rising by at least 4% a year.

Inside the basket, it’s a mixed bag. We’re seeing deflation in household furnishing and pet food, which is great. However, medical care services are going in the wrong direction, and car insurance is really putting a dent in people’s wallets.

Overall, the economy is doing well. Prices are moderating while unemployment is hovering near record lows. A soft landing, which once seemed like a dream that you dare to dream, might really come true.