US April inflation tapers to 2.3%; but rate outlook unclear

14 May 2025 , 04:26 PM

INFLATION EASES FURTHER, BUT QUESTIONS REMAIN

Over the last 2 months, US headline CPI inflation had fallen by 60 bps from 3.0% to 2.4%. In April 2025, it tapered another 10 bps to 2.3%, bringing it closer to the 2.0% target set by the Fed. Of course, this is not counting the impact of reciprocal tariffs, as and when it gets triggered. However, it now looks increasingly likely that reciprocal tariffs may never really happen and all that we could see would be a realignment of tariff levels. Trump has ostensibly used a mix of economic intimidation and moral suasion effectively to make other countries take a more rational approach to taxing imports. The Fed minutes will be put out in the last week of May, and the next Fed monetary policy comes up in mid-June. It remains to be seen if Jerome Powell buys this line of reasoning and cuts rates.

FOOD AND ENERGY PRICES TAPER; CORE INFLATION FLAT

The food inflation in April is lower by 20 bps at 2.8%. However, this comes in the background of a 40 bps spike in food inflation in March. Here is the full picture.

Inflation Basket Category	Apr 2025 (YOY)	Mar 2025 (YOY)	Inflation Basket Category	Apr 2025 (YOY)	Mar 2025 (YOY)
Food Inflation	2.80%	3.00%	Core Inflation	2.80%	2.80%
Food at home	2.00%	2.40%	Commodities less food and energy	0.10%	-0.10%
Cereals and bakery products	0.00%	1.10%	Apparel	-0.70%	0.30%
Meats, poultry, fish, and eggs	7.00%	7.90%	New vehicles	0.30%	0.00%
Dairy and related products	1.60%	2.20%	Used cars and trucks	1.50%	0.60%
Fruits and vegetables	-0.90%	-0.70%	Medical care commodities	1.00%	1.00%
Non-alcoholic beverages	3.20%	2.40%	Alcoholic beverages	1.80%	1.90%
Other food at home	0.70%	1.10%	Tobacco and smoking products	7.10%	6.80%
Food away from home	3.90%	3.80%	Services less energy services	3.60%	3.70%
Full service meals and snacks	4.30%	4.10%	Shelter	4.00%	4.00%
Limited service meals	3.40%	3.40%	Rent of primary residence	4.00%	4.00%
Energy Inflation	-3.70%	-3.30%	Owners’ equivalent rent	4.30%	4.40%
Energy commodities	-11.50%	-9.50%	Medical Care Services	3.10%	3.00%
Fuel oil	-9.60%	-7.60%	Physician Services	3.10%	2.90%
Gasoline (all types)	-11.80%	-9.80%	Hospital Services	3.60%	3.70%
Energy services	6.20%	4.20%	Transport Services	2.50%	3.10%
Electricity	3.60%	2.80%	Motor vehicle Maintenance	5.60%	4.80%
Natural gas (piped)	15.70%	9.40%	Motor vehicle insurance	6.40%	7.50%
Headline Consumer Inflation	2.30%	2.40%	Airline Fare	-7.90%	-5.20%

Data Source: US Bureau of Labour Statistics

In the US, Fed policy is based on PCE inflation. However, it is the CPI inflation that sets the tone for PCE inflation later in the month. Here are some key takeaways.

• Food inflation in April tapered by 20 bps to 2.8%. Downward pressure came from cereals, meat, and dairy products; offset by a spike in non-alcoholic beverages.
  
• Energy inflation in Mar-25 weakened by 40 bps to -3.7%. Downward pressure again came from fuel and gasoline; offset by a spike in electricity and piped gas.
  
• Core inflation in April was flat at 2.8%. Downward pressure came from apparel, motor insurance, and airfares; offset by spike in used cars, tobacco, and vehicle maintenance.

The fall in inflation is insignificant. While core inflation was flat, energy showed diverse trends. Even food inflation fell on a rather inflated base.

APRIL 2025 MOM INFLATION REBOUNDS TO 0.2%

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Nov 2024	0.4%	0.2%	0.3%	0.3%
Dec 2024	0.3%	2.6%	0.2%	0.4%
Jan 2025	0.4%	1.1%	0.3%	0.5%
Feb 2025	0.2%	0.2%	0.2%	0.2%
Mar 2025	0.4%	(2.4)%	0.1%	(0.1)%
Apr 2025	(0.1)%	0.7%	0.2%	0.2%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation for April 2025 bounced 30 bps to 0.2%; back to its February 2025 levels. The trends from yoy and MOM inflation are approximately the same; with both measures showing lower food prices, flat core inflation and a spike in energy services. What is interesting is that even as the US economy appears to be gaining from lower fuel and gasoline prices, the price of energy services is offsetting these gains. In terms of the impact on Fed rates, a lot would depend on how the Fed interprets the data.

CME FEDWATCH – RATE CUTS TO FEWER AND BACK-ENDED

Here is how the CME Fedwatch probabilities (based on implied Fed Futures trades) look after US BLS published April 2025 CPI inflation.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Jun-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	8.2%	91.8%
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	2.7%	35.9%	61.4%
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	1.6%	22.2%	50.9%	25.3%
Oct-25	Nil	Nil	Nil	Nil	Nil	0.8%	11.9%	36.6%	38.0%	12.6%
Dec-25	Nil	Nil	Nil	Nil	0.5%	7.9%	27.6%	37.5%	21.9%	4.6%
Jun-26	Nil	0.1%	1.2%	5.6%	15.4%	26.0%	27.4%	17.3%	6.0%	0.9%
Dec-26	0.1%	0.7%	2.9%	8.5%	17.4%	24.5%	23.6%	15.0%	6.0%	1.4%

Data source: CME Fedwatch

Despite lower inflation, the CME Fedwatch does not expect rate cuts in the June and July Fed meetings.

• The first rate cut in 2025 looks likely only in Sep-25, with probability of 74.7%.
  
• By Dec-25, probability of 50 bps rate cut remains elevated at 73.5%.
  
• By Jun-26, probability of minimum 75 bps rate cut is at 75.8%.
  
• By Dec-26, probability of minimum 75 bps rate cut is up marginally at 77.6%.

As of now, it looks like the Fed will cut rates by 50 bps overall in 2025; in 2 tranches in September and December. However, it appears there will only be 1 rate cut of 25 bps in 2026. Hopefully, the minutes and the next policy statement will throw some light!