There was scant evidence of tariff-induced inflation inside the U.S. April consumer price index, with prices advancing by 0.2% on the month in both the top-line figure and the core.
On a year-over-year basis, inflation advanced by 2.3% overall and by 2.4% in the core measure, which excludes the more volatile food and energy components.
In our estimation, overall inflation is increasing at a tolerable pace. Housing and service inflation remains elevated and sticky, which will provide little comfort to policymakers who will have to craft policy around the price shocks that loom because of higher tariffs.
Given the recent whipsaw changes in trade policy, it is probable that firms have largely locked in the status quo until they see the price increases attached to the arrival of good and intermediate inputs.
The Federal Reserve will most likely look through this report with the knowledge that trade-induced disruptions to supplies and pricing will characterize the next two reports.
For now, the Fed will most likely focus on still-elevated readings of service sector pricing and housing inflation.
The April report will most likely affirm the inclination of those Fed officials who are focused on the rising risk of stagflation.
Services, which comprise 64% of the index, advanced by 0.4%, up from 0.2% previously, which translates to a 3.7% increase from a year ago.
The housing sector advanced by 0.5%, up from a 0.3% gain in April, and was up by 4% over the past year. Shelter increased by 0.3% and the owners’ equivalent rent series increased by 0.4% on the month and by 4.3% annually.
Tariff-sensitive sectors such as electronics increased by 0.7% in April while apparel costs dropped by 0.2%.
Energy prices advanced by 0.7% and were down by 3.7% from a year ago. Energy commodity costs fell by 0.2% and gasoline dropped by 0.1%.
Read more of RSM’s insights on the economy and the middle market.
Medical care increased by 0.5% on the month and was up by 2.7% over the past year.
Food and beverage prices declined by 0.1% on the month and by 2.8% over the past year, while apparel costs dropped by 0.2% on the month and by 0.7% annually. Egg prices declined by 12.1% in April.
The transportation sector was unchanged as were new vehicles. The price of used cars and trucks declined by 0.5%.
Household furnishings increased by 1% while motor vehicle insurance increased by 0.6% on the month and motor vehicle repair costs advanced by 1.2%. Financial services costs increased by 1.4%.
Airline fares declined by 2.8% monthly because of softer demand across the travel sector and were down by a whopping 7.9% on an annual basis.
The pricing data in the travel sector affirms disappointing first-quarter earnings of the major air carriers and is a signal that consumption is slowing.
Recreation prices were flat, education and communications costs declined by 0.1% and commodity prices were flat.
The takeaway
Inflation advanced at a moderate pace in April with little evidence of tariff-induced inflation.
We think it probable that the pervasive uncertainty around trade policy caused businesses to simply remain in place until they had more information about the tariffs.
We expect the rollercoaster ride to lead to inflation of 4% or greater by the end of the year because of trade policy and what appears to be a baseline 10% increase in tariffs for almost all goods.
