Published 09 May, 2023
While last month marked a significant drop in US inflation to 5%, this was not enough to dissuade the Federal Reserve from continuing its rate-hiking cycle, as the central bank remains firmly focused on reaching its 2% inflation target. In the May FOMC meeting, policymakers opted for another 25 basis point increase and insisted that the US banking sector remains "sound and resilient" despite the recent turmoil.
However, while officials are clearly concerned that inflation is not coming down fast enough, Truflation's index currently shows US inflation at 3.88% (as of May 8, 2023) - significantly lower than the government's reported figure. With millions of data points measured in real-time, Truflation's US CPI index is 30 times faster than official numbers, providing a more accurate estimate of US consumer prices.
Nevertheless, we expect the April release to reflect renewed inflationary pressures as higher oil prices feed through to key sectors. This could surprise the market, causing volatility and driving the Fed to consider further monetary tightening. Let's dig deeper into the data for a clearer picture of US inflation.
The annual US Consumer Price Index (CPI), as the US Bureau of Labor Statistics (BLS) reported, saw a significant drop from 6% in February 2023 to 5% in March. Other economic indicators show a mixed picture: while GDP growth slowed from 2.9% in Q4 2022 to 1.1% in Q1 2023, the labor market remains stubbornly strong. As such, April’s inflation release is an important indicator that will likely inform the Fed’s next interest rate decision.
Following the significant drop in March, the market’s expectations for April’s inflation numbers are uncertain, ranging from 4.8% to 5.2%. Truflation’s data shows that the BLS release will come in at the upper end of this range at 5.1%, driven by accelerated price rises in the utilities, fuel, transportation, and clothing sectors.
We expect the announcement to raise questions about the Fed’s next interest rate decision. In its May FOMC meeting minutes, the central bank reiterated its firm commitment to a 2% inflation target and said it wouldn't hesitate to tighten monetary policy further if inflation remains sticky. With CPI on the rise again, the potential for another rate hike this year is back on the table.
Key drivers of lower inflation
The sectors driving higher estimates for April’s BLS inflation numbers are transportation, utilities, and apparel. Higher prices in these sectors are predominantly driven by the increase in oil prices, leading to higher costs of goods rather than services.
Truflation provides independent inflation indices based on 30+ different data partners/sources and more than 12 million product prices across the US. The indices are released daily, making it one of the world's most up-to-date and comprehensive inflation measurement tools. Truflation has been leveraging its measurement tool to predict the BLS CPI number. Over the past six months, Truflation has accurately predicted outcomes for two months, with a deviation of only 20 basis points for the third, which remained the closest to the market's projection. February’s prediction missed the mark by 60 basis points due to misaligned housing data.