United States
May 16, 2024
Fixed income
Headline and core consumer prices rose by 0.2% in April, lower than 0.3%, which the market had generally expected. This took headline CPI from 2.4% to 2.3% year-over-year, its slowest level since February 2021, while keeping core CPI at 2.8%
We expect the Fed to be encouraged by ongoing progress in the “stubborn” core services categories of the index, while there was little evidence of tariff inflation.
Little sign of tariff inflation
Core goods prices were muted at 0.1% in April, even in the most tariff-sensitive categories such as apparel, home furnishings and toys.
Elsewhere, energy prices were up 0.7%, driven by higher natural gas and electricity prices. Food prices also eased, with egg prices down 12.7%, falling for the first month this year following avian flu-related supply disruptions.
Figure 1: Headline CPI reached its lowest level since February 2021
Source: Bureau of Labor Statistics, Macrobond, Insight, May 2025
Encouragingly the “stickier” core services components of the CPI largely continued their disinflationary trends.
Shelter (the largest component of the index) remained at 4% year-over-year, largely due to stubborn rental inflation. Nonethless, we believe rents will continue to grind lower over the coming months based on private rental indicators. Excluding shelter, headline CPI was 1.4% year-over-year, significantly below the Fed’s target.
Elsewhere “supercore CPI” categories (which exclude shelter as well as food and energy), also showed steady progress, decelerating from 2.9% year-over-year to 2.7% (Figure 2). Transportation services, were largely flat in April, with airfare prices notably down 2.8% but car and truck rental prices up 4.3%.
Figure 2: Stubborn core services categories continue to gradually improve
Source: Bureau of Labor Statistics, Macrobond, Insight, May 2025
Traiff delays could help ease traiff pressure
The US and China’s recent agreement to pause most tariffs for 90 days will likely delay tariff inflation further into the summer. In our view, the talks meaningfully reduce the odds of extreme outcomes on the inflation front.
Figure 3: A pick-up in cargo volumes may help ease near term pricing pressures from tariffs
Source: Bloomberg, Insight, May 2025
Disinflation is likely to keep the Fed on track
We believe the Fed will be satisfied that disinflation trends remain in play and will be minded to “look through” tariff inflation given its likely “transitory” nature. Given the US administration’s potentially softening stance toward China and openness to agreements, we expect the Fed will remain on track to carefully continue its cutting cycle this year as economic growth likely moderates.
We believe this therefore remains an attractive environment for fixed income.
