April Inflation Report Cinches Fed’s Half-Point Rate Rise Path

The rapid pace of U.S. inflation last month offered little reassurance to the Fed even though the year-over-year rate of growth slowed. On a monthly basis, the consumer-price index rose a seasonally adjusted 0.3% in April, according to a Labor Department report on Wednesday. CPI also rose 8.3% from a year earlier, down from the annual increase of 8.5% in March.

Declines in energy prices offset large jumps in the prices of new cars and airfares and steady increases in rents in April. The core CPI, which excludes food and energy, rose 0.6% in April.

Because a decline in 12-month inflation readings has been largely anticipated, the question for Fed policy makers now shifts to where inflation might settle and whether that level will be unacceptably high for the central bank.

The monthly rate of increase in core inflation had eased somewhat in February and March. While Fed Chairman

Jerome Powell

said last week it would take more than another month of data to show sustained improvement, Wednesday’s report moved in the wrong direction.

Other Fed officials have said they are no longer focusing on the particular idiosyncratic drivers of price gains, such as an unusually large jump in airfares in April.

“At this point I don’t care what the reasons are. Inflation’s too high and my job is to get it down,” Fed governor

Christopher Waller

said during a moderated discussion on Tuesday. “We have to cool off demand and try to get inflation pressures down. If we get some help from supply-chain resolution, that’s fantastic, but I’m not counting on it.”

The central bank lifted its benchmark policy rate by half a percentage point last week, the first such increase since 2000, to a target range between 0.75% and 1%. Mr. Powell indicated officials were likely to continue raising rates at that pace at least through July.

While officials seem to have coalesced around the current pace of increases, investors are looking for signs that the Fed might dial that pace up or down. The Fed faces a related and arguably more important question over their ultimate destination for interest rates.

Investors in interest-rate futures markets expect the Fed to lift its benchmark rate by another 2 percentage points this year, to a range between 2.75% and 3%, according to

CME Group.

That would be consistent with half-point rate increases at the Fed’s next three policy meetings and then quarter-point increases at the last two meetings of the year.

Mr. Powell said last week that officials hadn’t actively considered a larger 0.75-percentage-point rate increase last week, and he suggested half-point increases in June and July were the Fed’s new baseline case. Officials could consider even larger increases if they see further deterioration in the inflation outlook, especially a sustained pickup in households’ and businesses’ expectations of longer-term inflation.

St. Louis Fed President

James Bullard

said the latest round of inflation data leaves the central bank on track for half-percentage-point increases at the next couple Fed meetings. Mr. Bullard, who has recently favored the most rapid rate-rise path among his colleagues on the rate-setting committee, said he doesn’t see a need for even more aggressive action during a Yahoo Finance interview on Wednesday. He said he would favor raising the Fed’s policy rate to around 3.5% by year-end.

Fed officials will have one more inflation report before their June 14-15 policy meeting and another ahead of their July 26-27 gathering.

The Fed’s preferred inflation gauge, the personal-consumption expenditures price index, weights certain items differently from the Labor Department’s measure that was released Wednesday and collects some price data from a different source. That index will be reported on May 27.

The pandemic sharply boosted spending on goods while reducing demand for services. Fed officials had hoped that inflation would ease as the composition of spending shifted back from goods toward services.

But Wednesday’s report, in which service-sector inflation excluding energy rose briskly, highlighted the risk that increased spending on services—together with rising housing costs—doesn’t provide the relief that many economists had been anticipating. That could bolster officials’ conviction that interest rates need to rise to levels high enough to deliberately slow economic growth.

Write to Nick Timiraos at [email protected]