US Inflation Hits 2-Year Low as Rate Hikes Begin to Take Effect

US inflation figures for April 2023 have been released, with figures slightly lower than the forecasted figure encouraging that Federal Reserve’s interest rate hikes are helping to mitigate price hikes.

With the consumer price inflation at 4.9% according to the latest figures, it marks the lowest CPI in the US since April 2021. The figure beat the prediction of economists who earlier forecasted that the CPI would remain unchanged at 5%. This is a significant improvement from last year when the CPI as of April 2022 was at a 40-year high of 8.3%.

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“It’s a step in the right direction,” Kevin Cummins, the chief US economist at NatWest Markets notes to Financial Times. He also noted, “Some of the doves on the [Fed’s policymaking] committee may feel emboldened by the fact you’re seeing evidence that the worst of it is past, but core inflation and core services are still rising at a pretty solid pace.”

According to Financial Times, the overall inflation came down but the core CPI i.e. inflation excluding food and energy remains unchanged. Although it dropped slightly to 5.5% year-on-year in April, it has remained relatively unchanged since the end of last year.

The overall inflation rate was lowered by decreasing airline fares, but despite this, there were still areas, such as used-car prices, where inflation remained strong. Housing costs also saw a slowdown in growth for the second consecutive month. However, there is still some ground to cover to meet the Federal Reserve target of 2%, which has yet to be achieved.

The headline CPI index and the core number both increased by 0.4% on a month-over-month basis.

In a statement on Wednesday, the White House remarked that the alleviation of gas and food prices is offering “some welcome breathing room for families” during a time when the US economy and job market remain robust. According to Karine Jean-Pierre, the White House Chief Press Secretary, the most significant risk facing the economy at present is the possibility of the US defaulting on its obligations.

In line with the downward trend of the CPI rates, Jay Powell, the US Federal Reserves Chairman noted last week,  “We’re getting close or maybe even [finished]” with interest rate hikes. And after the release of the inflation data, there was a surge in the request for US bonds, as investors are increasingly assured that the Federal Reserve may no longer implement rate hikes. Accordingly, data from the bond market showed that yield on the two-year Treasury diminished by 0.08% to reach 3.94%.

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However, the Federal Reserve has cautioned that the recent instability in the banking sector may lead to a credit crunch in the US, which could impede economic growth and have an impact comparable to the rate hikes.

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