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New inflation data is out—here's what it says about the state of the U.S. economy

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U.S. Federal Reserve Chair Jerome Powell discusses interest rate hikes at press conference in Washington, D.C., on May 4, 2022.
Xinhua News Agency / Getty

At last, consumers are starting to see some relief: The rate of inflation for consumer prices declined in April, according to highly-anticipated Labor Department data published Wednesday.

The overall year-over-year price of consumer goods and services is now 8.3%, a 0.2% drop from March's 40-year high, as measured by the consumer price index (CPI). That's a slightly slower deceleration than some observers expected: Ahead of the Labor Department's data release, 52 economists surveyed by Bloomberg projected an median estimated inflation rate of 8.1%.

The slowdown is partially driven by energy prices, which declined 2.7% in April after rising 11% percent in March. Gasoline prices fell 6.1%, as did used vehicles and clothing, which dropped 0.4% and 0.8%, respectively.

Falling prices on these products is good news for consumers — especially for gas prices, which have nearly doubled in the last year. The CPI numbers suggest that despite recent gas price surges, there are limits to how quickly those prices can grow.

Meanwhile, core inflation — which excludes typically volatile food and gas prices — doubled last month, going from 0.3% in March to 0.6% in April. The cost of shelter, food, airline fares, and new vehicles were the largest contributors to the all-items increase, according to the Labor Department.

In other words, pandemic-related supply chain issues and labor shortages are likely still a problem.

A possible turning point for inflation

Even if inflation has now peaked, a slower-than-expected slowdown implies that taming inflation will take longer than expected.

To reduce inflation down to a benchmark target rate of 2%, the Federal Reserve announced interest rate hikes in March and May, with five more likely to come in 2022. These hikes increase the cost of borrowing, which can slow down economic growth.

Hikes also tend to negatively affect the stock market, which is why investors look for signs that inflation is under control. If inflation is slowing, aggressive rate hikes beyond 0.25% increments are less likely — but the Fed has already suggested that 0.50% hikes could happen in June and July.

"There's good things and bad things in the report," says Tim Mahedy, a senior economist at global accounting firm KPMG. Reduced inflation, especially for gas prices, are good — but increased core inflation is a nagging concern, he says.

"For this report, I was holding my breath. And I was left holding my breath for next month's [report], because there's not enough there to make me think [inflation is] going one way or the other," he says. "If we don't get inflation below 8% in May, then I'll start to get concerned."

Barring unforeseen events, Mahedy says, a recession in 2022 is "very unlikely" despite widespread concerns. Consumer demand for goods and services remains very strong, and isn't expected to contract for the rest of 2022, according to his projections.

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