U.S. inflation remains at 40-year high, defying expectations for a bigger drop

U.S. consumer prices rose at an annual rate of 8.3 percent last month, beating economists’ expectations and remaining at a 40-year high, underscoring the urgency of the Federal Reserve’s push to curb inflation.

Although the consumer price index slowed for the first time in eight months – it was down from 8.5% Increase Recorded in March — slightly above economists’ expectations for an 8.1% gain. A fundamental measure of inflation also beat expectations, underscoring the pressures on households and the challenges facing a Biden administration.

The data initially shook the $22 trillion US government bond market. The two-year U.S. Treasury yield, the most sensitive to the outlook for monetary policy, rose about 0.12 percentage point to 2.73% before falling back to 2.64%. The yield on the benchmark 10-year Treasury note fell back below 3% in afternoon trading.

U.S. stocks also fell, led by a sell-off in tech stocks, with the Nasdaq Composite down 2.5% and the S&P 500 down 1%.

“This is not a surprise that the bond market or the Fed wanted,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.

In addition to price increases from last year, consumer prices rose another 0.3% from the previous month. That was down from the 1.2% gain recorded in March, driven by soaring energy and food costs related to Russia’s invasion of Ukraine.

Housing, food, airfare and new cars were the biggest contributors to last month’s CPI. However, weaker energy prices helped contain headline inflation, with the gasoline index down 6.1% month-on-month. That offset increases in gas and electricity costs, the Bureau of Labor Statistics, which publishes the data, said.

However, after excluding volatile items such as food and energy, the monthly increase in core CPI was 0.6% last month, compared with 0.3% in March. On an annual basis, this equates to an increase of 6.2%.

Economists forecast basic services inflation, which excludes energy services, to rise 0.7% per month. The ratio has risen steadily since December, rising nearly 5% year-over-year.

The latest uptick adds to concerns that price pressure is no longer a phenomenon unique to industries most affected by pandemic-related disruptions, but a broad trend affecting all industries.

“This shifts the balance of risks to more concerns about future inflation,” said Eric Stein, chief investment officer of fixed income at Eaton Vance.

Still, the figures may represent the beginning of a spike in inflation in the coronavirus-pandemic era caused by blazing consumer demand and severe supply chain bottlenecks.

Economists widely expect consumer price growth to slow further from these levels as the immediate impact of the Ukraine war fades. Headline annual inflation readings should also start to fall in the coming months compared to last year’s very high levels.

President Joe Biden said Wednesday that it was “encouraging” to see a slowdown in the annual data, but “the fact remains that inflation is unacceptably high.” “Inflation is a challenge for households across the country, and reducing it is my top economic priority,” he said.

Fed steps up efforts to curb price pressures rate hike Over two decades this month. Further increases are expected in June and July, and possibly even in September, with the federal funds rate expected to hit 2.7% by year-end.

The Fed is also set to begin shrinking its $9 trillion balance sheet in June, the second of two levers the central bank uses to cool the economy.

The main question for investors is whether the U.S. central bank can lower inflation without triggering a recession. New York Fed President John Williams said this week that the challenge of designing a soft landing will be difficult but “not insurmountable.”

John Hancock’s Rowland said the latest inflation data “certainly exacerbates the already rather difficult job” of the Fed’s ability to design a soft landing. “If inflation remains high, it will become more difficult.”

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