U.S. Inflation Slips Below 5% But Still Higher Than Fed's Target

U.S. inflation slipped below 5% in the month of April, marking the 10th straight month of declines as prices for milk, airline tickets, and new cars fell. However, U.S. consumer prices increased in April on higher gasoline costs and rents, with CPI rising 4.9% year-on-year. Although that marks a sharp decline since hitting a 40-year high of 9.1% last June, prices are still rising at more than twice the Federal Reserve's target rate of 2%, potentially ensuring that the central bank won't be increasing or cutting rates any time soon.

"There's a little something in the CPI report for both Fed hawks and doves. The still meaty core price increase will dissuade any thoughts of near-term rate cuts. However, signs of cooler services inflation should support a rate pause in June, and, we suspect, the remainder of the year," Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, has told Reuters.

Oil prices have come under pressure after the Federal Reserve raised interest rates, and the markets continued fretting over worsening macroeconomic conditions, including the growing risk of a recession. Recessions are known to kill demand for oil and gas faster than anything else, bar major black swan events like the recent global pandemic and subsequent lockdowns. Major recessions not only cause widespread job losses, leading to fewer people commuting to work, but also generally lower consumer spending. This leads to a reduction in the amount of fuel consumed.

Currently,  the U.S. economy is finely balanced between a significant mid-cycle soft patch and a full-blown recession.

The industrial sector, including manufacturing and freight transportation, is currently going through a prolonged downturn that fits the criteria for a recession. Monthly business surveys have repeatedly shown that manufacturing activity has been on the decline since November 2022, with the downturn confirmed by declining levels of container freight, diesel consumption, and industrial electricity sales.

Luckily, the much larger service sector has been recording marginal growth, small but enough to keep the economy as a whole out of recession.

By Charles Kennedy for Oilprice.com

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