Commentary Directory

US CPI Cools Across All Segments that the Fed Cares About

Jacob Hess
May 10, 2023

The latest release of the US CPI showed that inflation continues to calm, especially in the service sector. The data reveals that CPI grew by 0.4% MoM and 4.9% YoY in April, down from 5.0% YoY in March. First the volatile components, food CPI was unchanged for the second month in a row, with food at home falling by 0.2% MoM, offset by food away from home, which was up by 0.4% MoM. The YoY change in the food index slowed from 8.5% YoY to 7.7% YoY in April. The energy CPI rose by 0.6% MoM in April, but it was still down on an annual basis thanks to a -3.5% MoM decline in March. Natural gas prices fell by -4.1% MoM, while gasoline prices grew by 3.0% MoM, but gas prices were still down by -12.2% YoY.

Core CPI (excluding food and energy) grew by 5.5% YoY (0.4% MoM), falling just slightly from the 5.6% YoY reading in March. Within that, the goods CPI was the fastest growing on the month, up by 0.6% MoM, as used cars and trucks bounced back by 4.4% MoM, and apparel and medical care commodities saw slight gains. Overall, goods inflation was still low, up by just 2.0% YoY in April versus 1.5% YoY in March. In the services sector, the shelter CPI expanded, but at a slower rate of 0.4% MoM, which helped the services inflation rate to fall by -0.5 ppts to 5.8% YoY. Other services segments fell as well, with transportation services down by -0.2% MoM and medical care services down by -0.1% MoM.

The April CPI report is almost entirely composed of good news as inflation trends looked favorable in just about every segment. The moderation in the YoY change in the food index, falling energy CPI on an annual basis, and a slower rate of expansion in shelter CPI were some of these trends, and they all were important factors contributing to the decline in overall inflation from March to April. The only area where prices picked up more than usual was goods inflation, heavily influenced by a bounce in used vehicle prices. However, while goods inflation has picked up, it is still relatively low at 2%. Removing all of what the Fed might consider “the fat” in the index, the "Supercore" index (all items less food, shelter, energy, and used cars and trucks) was up just 0.2% MoM and 4.7% YoY in April, down slightly from 5.1% YoY in March. These data points support a pause in June as there was significant progress made in the areas where the Fed is looking. Its focus should shift to wages and the labor market as it now appears to be the final piece in the inflation puzzle to solve.