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U.S. core CPI cools for first time in 6 months in relief for Fed

In a sign of relief for the U.S. Federal Reserve, underlying inflation in the United States slowed in April for the first time in six months. The core consumer price index (CPI), which excludes volatile food and energy costs, rose by 0.3% from March and was up 3.6% from the previous year, according to government data released on Wednesday.

The core CPI is considered a more accurate measure of inflation trends compared to the overall CPI, which also increased by 0.3% month-over-month and 3.4% year-over-year. Shelter and gasoline prices were significant contributors to this increase, accounting for over 70% of the rise.

While these figures suggest inflation may be on a downward trend, Federal Reserve officials, including Chair Jerome Powell, remain cautious. Powell emphasized the need for patience, stating that the Fed would "need to be patient and let restrictive policy do its work." Some officials are not expecting any rate cuts this year.

However, the recent data has increased the possibility of a rate cut later in the year. Kathy Jones, chief fixed-income strategist at Charles Schwab, noted, "It does open the door to a potential rate cut later in the year," but added that more consistent readings of declining inflation are necessary for the Fed to take action.

Following the report, U.S. Treasury yields dropped, S&P 500 index futures rose, and the U.S. dollar weakened. Traders now see a 60% chance of a rate cut by September.

The Fed's goal is to manage inflation by reducing economic demand. Another report on Wednesday showed that retail sales stagnated in April, indicating that high borrowing costs and increasing debt are making consumers more cautious.

Over the past three months, core CPI has increased at an annualized rate of 4.1%, the smallest rise since the start of the year. Despite the overall cooling, prices for services like car insurance and medical care, as well as apparel, saw notable increases.

Shelter costs, a major component of the CPI, rose by 0.4% for the third consecutive month. The persistent high housing costs continue to be a significant factor in maintaining elevated inflation rates.

Excluding housing and energy, service prices increased by 0.4% from March, the weakest pace this year. This measure is crucial for the Fed when assessing inflation trends, even though it relies on a different index known as the personal consumption expenditures (PCE) price index, which is trending closer to the Fed's 2% target.

In addition to these figures, another report showed that producer prices rose in April more than expected, but key categories that influence the PCE were more moderate. Economists predict that the PCE index will show softer inflation when April's data is released later this month.

Bloomberg Economics analysts suggest that while the report gives the Fed some confidence in disinflation progress, they remain cautious. They note that April's CPI figures keep the chances of a July rate cut alive but not guaranteed.

Overall, the recent decline in core CPI is a positive sign for consumers and the economy, though it remains to be seen if this trend will continue and lead to changes in Fed policy.

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