By Geoffrey Smith
Investing.com -- U.S. inflation eased slightly in April but stayed close to a 40-year high, as strong price pressures in the broader economy continued to make themselves felt.
The annual headline rate of inflation fell to 8.3% from 8.5%, as last year's surge in used car prices started to drop out of the year-on-year calculations. However, that was still above the 8.1% expected.
U.S. stock futures immediately turned negative in response to the news, which reinforced expectations that the Federal Reserve will have to tighten monetary policy aggressively to bring inflation down. Money market futures moved to price in a higher likelihood of the Fed raising the fed funds target rate by 75 basis points at its next meeting in June, even though Fed Chair Jerome Powell had indicated at his last press conference that the Fed isn't "actively" discussing steps of more than half a point.
By 8:45 AM ET (1245 GMT), S&P 500 Futures lost 68 points, or 1.6%, to trade down 0.6% from Tuesday's close. Stocks had been on course to open higher before the data broke. By the same token, benchmark 10-Year U.S. Treasury yields rose 4 basis points to trade back above 3%.
The reason for the overshoot was another bigger-than-expected rise in core prices, which strip out volatile food and energy price movements. The core CPI rose 0.6% on the month, rather than the 0.4% expected. That was twice the 0.3% increase posted in March and was the biggest increase for three months, suggesting that the recent trend in inflation is hardly improving, if at all.
Prices for essentials such as shelter rose another 0.5%, the third month in a row they had risen by that much. Shelter costs are now up 5.1% on the year. New car prices also rose 1.1%, while the decline in used car prices slowed to only 0.4% from 3.8% in March. Prices for services, in general, rose 0.7%, with transportation services rising a seasonally adjusted 3.1% from March as demand for both tourism and business travel rebounded.
Airlines and hotel operators have both issued a string of upbeat forecasts for the rest of the year in their recent quarterly reports. Airfares alone rose an average of 18% on the month in April, for a 33% annual gain from last year's pandemic-depressed levels.
Food prices, meanwhile, continued to rise at a clip of nearly 1% a month, as they have done for the last six months.
"Inflation fell back from its 40-year high in April, but it's really really really high...and sequential core inflation momentum is concerning," said EY chief economist Greg Daco via Twitter.
Julia Coronado, a former Fed economist and founder of consultancy MacroPolicy Perspectives, was more sanguine, saying that while the economy is "not out of the woods" with regard to inflation, there were signs of hope in that more categories of goods and services were starting to show falling prices.