For the Third Month in a Row, US Inflation is Softer Than Forecast

U.S. inflation rose at a slower pace than expected in April, signaling that companies have not yet felt the need to raise prices aggressively, even as tariffs loom. Modest price changes for items like clothing and new vehicles helped keep inflation in check, pointing to limited urgency among businesses to pass higher import costs onto consumers.

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Data released by the Bureau of Labor Statistics on Tuesday showed that the core Consumer Price Index (CPI) — which excludes food and energy due to their volatility — increased by 0.2% from March. On a year-over-year basis, the core index rose 2.8%, the same pace as the previous month. The broader CPI, which includes all items, also climbed 0.2% for the month and 2.3% compared to April 2024.

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This inflation report highlighted several key areas where prices either fell or stayed flat, indicating cooling demand for some goods and services. Airfares and hotel costs dropped, suggesting reduced consumer appetite for leisure travel and other discretionary services. Prices for used cars, trucks, and clothing also declined, while grocery prices posted their first monthly drop in nearly a year. Notably, egg prices saw their steepest decline since 1984.

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Prices for new cars remained unchanged, defying predictions that tariffs might drive them higher. On the other hand, prices for household furniture and appliances — categories heavily reliant on imports — rose more noticeably, reflecting some impact from trade-related cost pressures.

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Although tariffs implemented by the Trump administration are generally expected to push prices up, many businesses may still be depleting large inventories built up in earlier periods of supply chain disruption. Until these stockpiles are drawn down, companies appear hesitant to hike prices. That said, despite a temporary truce over the weekend that eased tariffs on Chinese imports — cutting combined levies from 145% to 30% — uncertainty still hangs over the trade landscape.

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U.S. importers continue to navigate higher trade costs and remain cautious about future increases once the current 90-day reprieve ends. Bloomberg Economics warns that if restocking after this pause creates supply chain bottlenecks, especially at ports, it could actually lead to quicker price increases down the road, adding pressure to the CPI.

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In the immediate aftermath of the report, financial markets reacted positively. Treasury yields extended their gains, the U.S. dollar weakened, and futures on the S&P 500 reduced their earlier losses. The market saw the tamer inflation data as reducing pressure on the Federal Reserve to tighten monetary policy any further.

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Despite inflation cooling for now, the Fed is expected to keep interest rates steady for the foreseeable future due to lingering uncertainties around tariffs and how they might affect broader economic conditions. Economists agree that the recent pause in tariff escalation with China has lessened the chances of a recession in the U.S., but trade-related costs are likely to keep inflation running above the Fed’s 2% target for some time.

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Some major companies, including Nintendo Co. and Procter & Gamble Co., have indicated they plan to pass on some of the additional tariff-related expenses to consumers. However, their ability to do so may be constrained as demand softens. April’s retail sales data, set to be released Thursday, is expected to show flat consumer spending, particularly for goods — which would further limit businesses’ pricing power.

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In terms of core goods prices — again excluding food and energy — the CPI data showed minimal movement, indicating subdued inflation in that sector. However, services, especially housing, continue to be a key inflation driver.

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Housing costs — the largest component of the services sector in the CPI — ticked up in April. Shelter prices increased by 0.3% for the month, primarily due to rising rents. This area has been a consistent source of inflation pressure in recent years and continues to play a significant role in keeping overall inflation elevated.

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While much of the market’s focus remains on the immediate effects of tariffs on goods, it’s important to note that service costs — and especially housing — are proving to be more persistent contributors to inflation. As long as rents and shelter costs continue to climb, any broader disinflationary trend may be slower to materialize.

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In sum, April’s CPI data paints a mixed picture. On the one hand, inflation appears to be stabilizing, offering some relief to consumers and policymakers. On the other hand, underlying risks remain — from future trade tensions to sticky service prices — keeping the Fed cautious as it assesses when, or if, to adjust interest rates.

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