In April, the overall rate of inflation in the United States came in at 2.3% compared to the same month last year. That’s the lowest year-on-year increase since early 2021, and on the surface, it sounds like positive news for the economy and for everyday consumers.
Inflation is complex, however, and while the headline number gives a general idea of how fast prices are rising, investors need to dig deeper into the details to understand what is going on. We want to understand what’s really driving inflation, and whether it’s moving in the right direction in a sustainable way.
One key method analysts use is looking at something called ‘core inflation.’ This means they take out food and energy prices from the data. They do this because these prices tend to swing up and down quickly and sharply, for reasons that have little to do with long-term inflation trends. For example, energy prices can spike if oil supplies are disrupted by war or extreme weather. Food prices can jump if there’s a drought or a poor harvest.
By stripping these numbers out of inflation calculations, economists get a clearer view of the underlying inflation trend. They also like to look at the changes in prices from month to month, rather than just comparing to last year.
Using this more detailed approach, April’s data was still good (in terms of inflation staying low) but more nuanced. Core inflation actually ticked up slightly, suggesting that some parts of the economy are still seeing more persistent price pressures, but nothing major.
One of the big reasons core inflation remains sticky is housing. When we talk about housing inflation, we don’t just mean the price of buying a home, it also includes rent and what homeowners would pay if they were renting their own home.
The problem is that housing costs tend to move in a choppy, uneven way. They don’t rise gradually like some other prices. Instead, they often stay flat for a while and then make a sudden jump. That’s exactly what happened in April and it pushed US core inflation a little higher.
Outside of housing, services like healthcare, education, and leisure activities also saw some price rises too. These types of services are closely watched by the Federal Reserve (America’s central bank) because they reflect wage growth and other long-term trends. Unfortunately, those prices haven’t fallen much either, which means the battle to get inflation back to the Fed’s 2% target isn’t won just yet.
Another issue on the radar is tariffs. Tariffs are taxes that a government places on goods it imports from other countries. If the US government adds tariffs, companies that bring goods into the country may face higher costs. Often, they pass these costs on to consumers in the form of higher prices.
President Donald Trump’s tariffs on a range of imported goods, especially those coming from China, could likely cause businesses to start raising prices in anticipation.
Some signs of this may already be showing in the data. For example, the price of furniture rose 1.5% between March and April, a relatively big jump in a single month. Furniture is an import-heavy category, meaning a lot of it comes from overseas. That’s why it’s especially sensitive to changes in trade policy.
However, it’s difficult to say for sure whether tariffs are behind this price spike. Economic data can be noisy, meaning it bounces around due to random fluctuations or short-term factors.
Overall, though, headline inflation in the US remaining stable, and core inflation rising only slightly, is good news for markets. It means, for now, inflation remains under control and this is good for risk asset prices!
