A slight moderation in inflation will likely provide some needed boost in consumer confidence but we may have to wait another month. The April inflation report was not as soft as many hoped.

Inflation rose a bit higher than expected in April. Prices in April rose 0.3% from a month ago and 8.3% from a year ago. Prices in some of the service sectors spiked. For example, airfare rose over 18% after strong price increases in February and March. “Prices in the service sector added upward pressure last month as consumers pivoted from goods to experiences and this rise in services prices could happen again next month too,” explained LPL Chief Economist Jeffrey Roach.

Overall inflation has likely peaked, as base effects pushed the year-over-year metrics down in April relative to March. As we share in the LPL Chart of the Day, inflation is likely past peak but the cool down period may take a while as prices in the services sectors could stay elevated in the near term.

View enlarged chart.

Fed Still On Track to Hike

April data will not likely change expectations that the Federal Open Market Committee (FOMC) will hike by 50 basis points at their next meeting on June 14-15. Investors and policy makers know inflation will likely stay above target for a while but both will focus on the direction of the change. If prices moderate in the coming months, the FOMC may have flexibility to move to 25 basis point increments later this year.

The Federal Reserve’s preferred inflation gauge is the Personal Consumption Expenditure (PCE) deflator and we could likely see a more definitive decline in the deflator when released on May 27. The Fed prefers the deflator metric because the CPI tracks a fixed basket of goods and services and does not account for product substitutions consumers make when prices change. Whereas, the PCE deflator tracks price changes of actual consumer purchases.

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