Softer CPI and retail sales numbers from the US put a September rate cut back in play

A collective sigh of relief in the markets today as the US CPI numbers came in on the soft side. Both the core and headline monthly figures ended a run of consecutive 0.4% readings (since January and February respectively) to print at 0.3% and which, while being only modest falls, have provided the market with the confidence to believe Powell’s recent assertion that the stronger inflation readings seen over Q1 have been just “bumps in the road”. On an annual basis, core CPI fell to 3.6%, its lowest level since April 2021.

Of course, a 0.3% monthly reading remains incompatible with a 2% annual CPI target. But it will give the Fed reason to believe that monetary policy is restrictive enough to bring CPI back to target. And, while the CPI numbers going forward will need to fall further before a rate cut will be delivered (unless we see a sharp deterioration in the labour market), today’s report suggests that the trend of disinflation is reasserting itself again.

Encouragingly, the slowdown in inflationary pressures reported for April was broad based. A combination of a slowing labour market, manifesting itself in lower wages growth, is bearing down on services CPI, while downwards pressure on retail margins, one of the key drivers of the post-pandemic inflationary surge, is also helping to drive costs lower. Overall, services CPI rose by 0.42%, down from the 0.47% figure recorded for March, and the lowest reading seen since December. Meanwhile, core goods prices fell -0.1%, reversing the 0.1% rise seen in March, with falling auto prices a significant factor behind this decline.

Looking forward, the case for expecting CPI to soften further throughout 2024 looks strong: wages growth is weakening, supply chains are continuing to normalize, retail margins are under pressure and global fuel and food prices remain relatively benign. The main drivers of the higher prices seen post-pandemic are no longer there. While the Fed will want to see further evidence of falling prices before agreeing to a rate cut, the prospects of a first cut being seen in September remains in play.

Meanwhile, the retail sales figures released at the same time showed US consumption continuing to weaken, with sales growth stalling as a combination of lower wages growth and the on-going tightening in credit availability, meant real post-tax incomes are continuing to fall. Today's below consensus prints, alongside the downwards revisions reported for the March numbers, are yet further evidence that the slowdown in consumption expected this year is well and truly under way, consumers feeling pressured by a combination of rising prices and an increasingly less certain jobs market. Of particular concern will be the small 0.2% rise seen in food services sales, typically viewed as a key guide to the strength of consumer spending on services generally, and which had been, until today, very much the key engine of consumption growth, since this modest rise was accompanied by -1.0% of downwards revisions. Going forward, the slowdown in consumption growth seen in Q1 still has further to run, as the labour market weakens, wages growth slows, real post-tax incomes fall, and a largely exhausted cushion of excess savings built up during the covid pandemic proves unable to provide the safety cushion seen over much of the last two years.

Taking the two reports together, there is enough to undo the moves seen yesterday in the wake of the April PPI release, which saw the markets scale back the monetary easing expected from the Fed this year. Combining both reports presents a significantly larger hook on which the FOMC could hang an interest rate cut, leaving September as once again being seen as a likely date for a first interest rate cut to be delivered. Although the possibility of an easing being seen in July remains a possibility, if only a relatively small one.