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The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors typically look at core CPI, which excludes the food and energy components. In April, Core CPI was 3.6% higher than a year ago, down from 3.8% last month, and the lowest annual rate of increase since April 2021.
Although the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed. One big reason is that shelter (housing) costs remain elevated and again were responsible for the largest portion of the increase. However, the CPI data measures shelter costs with a lag, and more timely indicators from other sources suggest that this component will slowly come down later in the year. Beyond shelter, apparel and medical care posted large increases in April, while new and used vehicle prices unexpectedly revealed nice declines.
Over the last couple of years, the two main pillars of the economy have been surprising strength in the labor market and consumer spending. They are linked to a large degree, as consumers are more comfortable spending money when they are confident in their job prospects. However, the data released so far this month has revealed possible cracks in both areas. The labor market data released during the first week of May fell short of expectations. Similarly, the latest report showed that retail sales in April were flat, far below the consensus forecast for an increase of 0.4%, and the results for the prior month were revised lower as well. In general, consumers shifted more spending to essentials while cutting back on luxury goods.
Based on the latest data, the severe shortage of homes in many regions shows few signs of letting up any time soon. In April, overall housing starts rose 6% from the prior month, far less than expected, and the results for March were revised down to the lowest level since June 2020. The gains came entirely from multi-family units, as single-family units declined slightly in April. Single-family building permits, a leading indicator of future home construction, fell for the third straight month to the lowest level since August. One of the few bright spots in the report was that single-family starts still were 18% higher than a year ago.
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