US CPI is good news, but old news

The April CPI report was lower than expected, bringing the annual headline increase to 2.3%, the smallest year-over-year gain since February 2021. Core inflation was equally muted, with the annual rate unchanged at 2.8%. While there was some early evidence of tariff-related pass-through, today’s CPI data is likely already outdated, especially given the recent significant shifts in trade policy over the past month.

Report details

• Monthly headline inflation declined 0.2% in April, slightly lower than expected, bringing the annual rate to 2.3%—from 2.4% prior and the smallest year-over-year gain since February 2021. Core inflation, which strips out food and energy, also came in lower than expected, increasing 0.2% in April, leaving the annual rate unchanged at 2.8%. The report provides a first holistic look at how the administration’s ‘Liberation Day’ tariffs are feeding through to prices, which appears milder than expected—so far. Nevertheless, given the ever-shifting policy environment on trade, this data is likely already outdated.
• Food prices decreased 0.1% in April, with prices for food at home falling 0.4%, the largest decline since September 2020, primarily driven by a 12.7% decline in egg prices as the impact of bird flu has eased. Energy prices increased 0.7% in April.
• Core inflation has remained predominantly a function of services prices, which increased 0.3% on the month. Shelter remained the largest contributor to the services category, with owner’s equivalent rent rising 0.4%. Meanwhile, an ongoing weakening in travel demand amid elevated macro uncertainty has weighed on airfares and lodging away from home prices. Both were among the major categories that led declines in core inflation.
• Core goods prices increased 0.1%, primarily driven by categories most likely to have been affected by tariff hikes, including recreational commodities and household furnishings. It remains too early, however, to see the full effect of the tariffs, which are likely to continue to filter through to prices in the months ahead.
• The Fed's preferred supercore inflation measure, which excludes shelter from core services and is primarily driven by wage costs, increased by 0.2%, bringing the annual rate down to 2.7%, from 2.9% prior.

Policy outlook

Today’s softer than expected inflation report suggests that tariffs have yet to feed through to inflation. But, it is questionable whether today’s CPI print moves the needle after the rollercoaster ride of trade policy of the past month. Not only is the April CPI report unlikely to have fully captured the tariff impact post-Liberation Day, but inflation numbers will now be further whipsawed by the U.S.-China temporary trade truce announcement.

Nevertheless, with tariffs still higher today compared to the start of the year, an inflationary impulse is likely still forthcoming and should emerge during late Q2. This impact may be partially and quickly eroded, particularly for core goods prices, however, if container traffic rapidly resumes in light of the drop in U.S.-China tariffs. The overall implication is that a clear read on the inflation trend won’t be visible for several months yet, which likely implies a prolonged Fed pause.