The annual rate of inflation in the US, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), stood at 4.9% in April. This is according to data released by the Bureau of Labor Statistics on Wednesday. Inflation on the CPI-U measure has now slowed for ten consecutive months since last June’s peak of 9.1%, with the headline rate now at its lowest level in two years. April’s reading also came in slightly lower than consensus expectations of 5.0%. 

The recent slowdown in the rate of inflation in the US has largely been driven by energy prices. Falling wholesale prices have been key, reducing the upward pressure on inflation from household bills. Indeed, energy’s contribution to April’s inflation rate was negative, with prices being down by 5.1% on the year. This reflects a base effect, given that energy prices began to escalate this time a year ago, as a consequence of Russia’s invasion of Ukraine. Within the energy category, particularly stark annual deflation was seen for motor fuels, for which prices fell by 12.6% on the year. Some energy subcategories continue to see positive annual price growth, however. For instance, electricity prices were up by 8.4% on the year in April, close to twice the headline rate of inflation.

Away from energy, price growth remains stubbornly high. Essential consumption categories such as food and shelter saw price growth exceed the headline rate once more in April, at 7.7% and 8.1%, respectively. On a monthly basis, the CPI-U rose by 0.4%, accelerating from the 0.1% seen in March, with the index for shelter representing the largest contributor to the monthly all items increase. Meanwhile, core inflation, which excludes more volatile consumption categories, eased slightly to 5.5% in April, down from 5.6% in March, underscoring the persistence of broad-based price pressure in the US economy.

Today’s data on annual inflation comes after the Federal Reserve (Fed) raised its base interest rates to its highest level in 16 years last week, bringing the federal funds rate to a target range of 5.00% – 5.25%. Moreover, the Fed signalled that it may be finished with its current tightening cycle by removing a sentence pointing to the need for additional policy firming in its statement. Indeed, the Fed has warned that recent banking turmoil, and subsequent developments in the sector, could result in a credit crunch that could slow economic activity and act as a substitute for further rate rises. 

Nonetheless, recent data continue to point to the persistence of strong inflationary pressure, with monthly inflation once again ticking up, and the labour market continuing to show signs of strength amidst stronger-than-expected payroll additions in April. Fed chair Jerome Powell has stated that “it would not be appropriate to cut rates” if prices recede slower than expected, and today’s data, while pointing in the right direction, add to the likelihood of interest rates staying in restrictive territory for some time. All else equal, higher interest rates have a dampening effect on economic activity, by making debt more expensive and incentivising savings. In all, this contributes to the weaker growth outlook for the US, with Cebr currently expecting the US economy to grow by just 0.8% in 2023, a marked slowdown from the 2.1% seen in 2022. This would make it the weakest annual growth performance since 2009, after excluding the pandemic induced recession in 2020.

Pushpin Singh is an Economist at the Centre for Economics and Business Research.