News

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices rebounded moderately in April, leading to the smallest annual increase in four years, but the inflation outlook remains unclear against the backdrop of tariffs.

The rise in prices reported by the Labor Department on Tuesday was below economists' expectations and did not change their view that the Federal Reserve would continue to pause its interest rate-cutting cycle until late in the summer. The data suggested that price pressures were cooling before President Donald Trump's sweeping import duties, whose impact is expected to become evident starting with consumer price data in May.

Though the U.S. and China took a major step towards de-escalating their trade war over the weekend, a 10% blanket duty on almost all imports remains in place, as do sectoral tariffs.

"Improvements in global trade will provide some clarity on the future path of inflation," said Jeffrey Roach, chief economist at LPL Financial. "However, the uncertainty about what might happen after these temporary trade deals makes things difficult for the Fed since stagflation remains a risk. If the fog does not clear, the Fed might not be able to adjust policy in June."

The Consumer Price Index increased 0.2% last month after dipping 0.1% in March, which was the first decline since May 2020, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the CPI would rise 0.3%. Shelter, which includes rents, accounted for more than half of the increase in the CPI.

That jump was partially offset by a 0.1% decline in food prices, which followed a 0.4% gain in March. Grocery store prices decreased 0.4%, the largest decline since September 2020, pulled down by a 12.7% drop in the cost of eggs. Egg prices, however, surged 49.3% from a year ago. Fruit and vegetable prices fell last month as did those for cereals and bakery products.

But prices for nonalcoholic beverages increased 0.7%.

Gasoline prices eased 0.1%, though consumers faced higher costs for natural gas and electricity.

In the 12 months through April, the CPI climbed 2.3% after advancing 2.4% in the 12 months through March.

The data likely only captures tariffs, including a doubling of fentanyl-related taxes on all Chinese imports to 20% and a 25% levy on imported cars and light trucks, imposed before Trump's April 2 "Liberation Day" announcement.

While Trump in April paused for 90 days most of his country-specific tariffs, a 10% blanket duty on almost all imports remained in place.

HIGHER INFLATION STILL EXPECTED

The Trump administration has agreed to slash duties on Chinese goods to 30% for the next 90 days. Tariffs on U.S. goods imported into China would decline to 10% from 125%.

Economists still expect inflation to rise this year because of the tariffs, but probably not as sharply as they had anticipated before the 90-day truce between the world's two largest economies, allowing the U.S. central bank to maintain its wait-and-see policy stance. They also see the easing of trade tensions helping the U.S. economy to avert a recession, though growth was likely to be sluggish this year.

Shorter-dated U.S. Treasury yields eased slightly on the inflation data, while U.S. stocks were mostly trading higher. The dollar slipped against a basket of currencies.

Excluding the volatile food and energy components, the CPI rose 0.2% last month after gaining 0.1% in March. The so-called core CPI inflation was lifted by a 0.3% rise in the cost of shelter, which reflected a 0.4% advance in owners' equivalent rent. That more than offset a 0.1% drop in the cost of hotels and motel rooms. Prices for household furniture jumped 1.0%.

The motor vehicle insurance index rose 0.6%. The cost of airline fares dropped 2.8%, while prices for used cars and trucks fell 0.5%. Prices for new motor vehicles were unchanged.

The core CPI increased 2.8% on a year-on-year basis in April, matching the rise in March.

"Inflation will likely rise to a lesser degree, peaking at around 3.4% year-over-year in the fourth quarter this year instead of our prior forecast of 4%," said Kathy Bostjancic, chief economist at Nationwide. "Economic growth still slows since tariff rates will be higher than before President Trump took office."

The Fed has a 2% inflation target. U.S. duties are looming on pharmaceutical products and semiconductors. Trump sees tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base.

The Fed last week kept its benchmark overnight interest rate unchanged in the 4.25%-4.50% range. Financial markets expect the central bank to resume its policy easing in September.