The rate of annual inflation fell below 5% for the first time in two years, the federal government said Wednesday, and yet rising prices continue to take a hefty toll on consumers' budgets.
The goodish news on inflation is that the Consumer Price Index (CPI) for April increased "only" 4.9% year-over-year, according to the Bureau of Labor Statistics. That represented a slight slowdown from the 5% increase recorded in March, and came in below economists' expectations.
On a monthly basis, the CPI increased by 0.4% compared with March's gain of 0.1%. Economists expected monthly CPI to rise 0.6%.
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Perhaps most important, core CPI, which excludes volatile food and energy prices, also came in lower than expected. Stubbornly elevated core inflation has contributed to the Fed's reluctance to stop raising interest rates. On an annual basis, core CPI rose 5.5% in April, vs estimates for a gain of 5.6%. March's year-over-year core CPI reading also came in at 5.6%.
"Inflation has finally surprised on the downside," says Ben Vaske, investment strategist at Orion Portfolio Solutions. "Core CPI, however, especially in the areas of transportation and shelter, is proving stickier than expected."
While the core CPI picture could be more encouraging, it's fair to say the worst inflation to hit consumers since the late Carter and early Reagan administrations peaked nearly a year ago.
Which brings us to the less-good news about inflation. Prices are still rising at rates not seen in generations.
Between 2000 and 2020, annual inflation in the U.S. averaged just 2.1%. (Recall that the Federal Reserve's inflation target is 2%.) Perhaps we didn't appreciate it enough at the time, but the first two decades of the 21st century were a sort of goldilocks era for inflation: not too fast and not too slow.
Just have a look at some of the subcategories in the latest the CPI report to see how much things have changed. Below we highlight the goods and services that are weighing most heavily on folks' finances.
Rising prices: where inflation is hitting hardest
One of the largest contributors to inflation in April was in housing. No surprise there. The shelter component, which counts sundry costs for keeping a roof over one's head, rose 0.4% last month and 8.1% year-over-year. True, home prices and rents have been in a national downtrend since June 2022, but higher owners' equivalent rent and the fact that the data are backward looking are just a couple of reasons for this CPI component remaining elevated.
Then there's food. Although food inflation also continued to moderate with a flat reading in April vs the prior month, prices rose 7.7% year-over-year. Drilling down a bit, the index for cereals and bakery products rose 12.4% over the past12 months, fruits and vegetables prices rose 2%, and so-called "other" food at home rose 10.4%.
Prices for food away from home, which includes eating at restaurants and hotels, increased 0.4% in April and 8.6% over the past year.
Meanwhile, all energy prices fell 5.1% on an annual basis (after Russia's invasion of Ukraine caused them to spike last year). Gas prices, which fell 12.2%, led the category's decline, but not all energy sources are cheaper than they were a year ago. Most notably, electricity prices rose 8.4% over the past 12 months.
Elsewhere, services excluding energy rose 0.4% in April and 8.1% year-over-year. "Recreation services prices rose a strong 0.7% in the month, and other personal services jumped by an even stronger 1.5% in April," notes Sarah House, senior economist at Wells Fargo Economics.
The bottom line is that on an annual basis, inflation was primarily driven by sharply higher costs for food, shelter, electricity and transportation services. While inflation may be moderating, it will clearly be quite some time before we get back to the good old days of 2% increases.
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