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Inflation Continued to Decline in April

Inflation ticked down further in April, according to new data from the Bureau of Economic Analysis (BEA). The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew at a continuously compounding annual rate of 3.1 percent in April, down from 4.1 percent in the prior month. It has grown at an average annual rate of 3.7 percent over the last three months.

Inflation has typically exceeded the Fed’s average inflation target since January 2020, with thirty-eight of fifty-one (74.5 percent) months registering inflation above 2 percent. Prices today are 16.4 percent higher than they were in January 2020 and 9.0 percentage points higher than they would have been had they grown at an annualized rate of 2.0 percent over the period.

Figure 1. Headline and Core Personal Consumption Expenditures Price Index with 2-percent Trend, January 2020 – April 2024

Core inflation, which excludes volatile food and energy prices, has also declined. Core PCEPI grew at a continuously compounding annual rate of 3.0 percent in April, compared with 4.0 percent in the prior month. It has grown at an annualized rate of 3.4 percent over the last three months.

While inflation is declining once more, members of the Federal Open Market Committee (FOMC) have suggested rates would need to remain high for longer than they had previously projected. In the minutes of the most recent FOMC meeting, released last week, members “noted disappointing readings on inflation over the first quarter and […] assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent.” Some members even “mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.”

In March, the median FOMC member projected that the federal funds rate target range would decline to 4.5 to 4.75 percent by December 2024, which would amount to three twenty-five basis point cuts this year. It seems likely that they will revise that projection when they meet again in June. The CME Group currently puts the odds that the federal funds rate target will fall at least that low at just 12.4 percent. There is a 34.4 percent chance that the target range will be 4.75 to 5.0 percent in December and a 38.6 percent chance that it will be 5.0 to 5.25 percent. There is a very slim chance (0.2 percent) that the FOMC will have a higher target come December.

FOMC members will almost certainly vote to hold their target rate constant at June’s meeting. Absent an incredible decline in inflation, real output, or employment, they will probably hold the target rate constant in July as well. The CME Group gives a slight edge (54.9 percent) to a lower target rate following the September meeting, though November looks more likely (67.8 percent).

When the Fed will begin cutting rates — and how quickly it cuts once it starts — will ultimately depend on the incoming data, and how much confidence the incoming data gives FOMC members that inflation is finally back on track. For now, one should expect interest rates to remain high for some time.

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