April Inflation Report Cinches Fed’s Half-Point Rate Rise Path

Declining energy prices offset large jumps in the prices of new cars and airfares and steady increases in rents in April. Core inflation, which excludes the volatile food and energy categories, increased a seasonally adjusted 0.6% on the month. Core inflation rose 6.2% in April from a year earlier, down from March’s 6.5% rise.

Wednesday’s report offers few signs that would give Fed officials comfort to dial back a more aggressive pace of rate increases this summer. Because a decline in 12-month inflation readings have been largely anticipated, the question now shifts to where inflation might settle and whether that level will be unacceptably high for the central bank.

The monthly rate of increase in core inflation had eased somewhat in February and March. While Fed Chairman

Jerome Powell

said last week it would take more than another month of data to show sustained improvement, Wednesday’s report moved in the wrong direction.

“One month’s reading does not tell us much,” said Mr. Powell at a press conference on May 4. “We’d want to see evidence that inflation is moving in a direction that gives us more comfort.”

The central bank raised its benchmark policy rate by a half percentage point last week, the first such increase since 2000, to a target range between 0.75% and 1%. Mr. Powell indicated officials were likely to continue raising rates at that pace at least through July.

While officials seem to have coalesced around the current pace of increases, investors are looking for signs that the Fed might dial up or down that pace. The Fed faces a related and arguably more important question over their ultimate destination for interest rates.

Investors in interest rate futures markets expect the Fed to lift its benchmark rate by another 2 percentage points this year, to a range between 2.75% and 3%, according to

CME Group.

That would be consistent with half-point rate increases at the Fed’s next three policy meetings and then quarter-point increases at the last two meetings of the year.

Mr. Powell appeared to rule out a larger 0.75-percentage-point rate increase last week when he said Fed officials weren’t actively considering it. Officials would be more likely to revisit that question if they saw signs of a sustained pickup in households’ and businesses’ expectations of future inflation.

Fed officials will have one more inflation report before their June 14-15 policy meeting and another ahead of their July 26-27 gathering.

The Fed’s preferred inflation gauge, the personal-consumption expenditures price index, weights certain items differently from the Labor Department’s measure that was released Wednesday and collects some price data from a different source. That index will be reported on May 27.

The pandemic sharply boosted spending on goods while reducing demand for services. Fed officials had hoped that inflation would ease as the composition of spending shifted back from goods toward services.

But Wednesday’s report, in which service-sector inflation excluding energy rose briskly, highlighted the risk that increased spending on services—together with rising housing costs—doesn’t provide the relief that many economists had been anticipating. That could bolster officials’ conviction that interest rates need to rise to levels high enough to deliberately slow economic growth.

Write to Nick Timiraos at [email protected]