Economic Watch: Annual Inflation in April Falls to Lowest Rate in Two Years

Executive Summary

• The annual inflation rate as measured by the Consumer Price Index (CPI) eased to 4.9% in April—the lowest level in two years and slightly less than consensus expectations of 5%.
• April’s inflation was driven by price increases for used cars, gasoline and shelter. Prices fell in other segments, such as heating oil, new motor vehicles and “food at home.”
• Core inflation, which excludes food and energy prices, rose by 5.5% year-over-year, still well above the Fed’s 2% target but below its peak last September. Importantly, services inflation is cooling in various areas.
• CBRE believes that interest rates have peaked. However, last week’s report of strong job and wage growth in April increases the outside chance of another rate hike this year.

The Bottom Line

The headline annual inflation rate eased slightly to 4.9% in April from 5.0% in March—the lowest level in two years. The decline was driven by lower energy, new motor vehicle and food-at-home prices. However, core inflation, which excludes food and energy, rose by 5.6% from a year ago and remains well above the Fed’s 2% target. We expect that shelter price inflation will continue to ease due to higher mortgage rates and lower rent growth. This is notable because shelter (apartment rent and owner’s equivalent rent) accounts for one-third of the CPI. Furthermore, signs of cooling inflation in other services segments are encouraging.

CBRE expects that elevated core inflation and rising wages likely will dissuade the Fed from cutting rates in the coming months. We expect that the Fed will hold rates at a high level even as a moderate recession takes hold around midyear. Financial market volatility will temper real estate investment activity over the coming months before a recovery begins later in the year. Leasing activity also should begin to recover by year-end.

Figure 1: CBRE House View