The S&P 500, Nasdaq and Dow all hit record highs after favorable inflation data

The S&P 500, Nasdaq and Dow all hit record highs after favorable inflation data

All three major indexes surged to record highs on Wednesday after new data showed that inflation eased in April after rising recently.

The S&P 500, Nasdaq Composite and Dow stocks all closed at new record highs after the latest Consumer Price Index showed that prices rose 3.4% for the 12 months ended in April, down from 3.5% in the previous month.

The broad-market S&P 500 gained more than 1.2% on Wednesday and broke through the 5,300 level for the first time, closing at 5,308.15. The Nasdaq was about 1.4% higher, setting a new record at 16,742.39. The Dow, meanwhile, rose 350 points or 0.9% and teetered near the key 40,000 level, closing at 39,908. All three major indexes headed for a winning week.

Investors believe that cooler inflation readings, coupled with a separate report showing weak retail sales in April, increase the likelihood that the Federal Reserve will cut interest rates this year.

“Taken [together with retail selling] this supports the Fed’s rate cut in the fall,” Gary Pzegeo, head of fixed income at CIBC Private Wealth US, wrote in a note to clients Wednesday. “The market discounted the cut in September and has moved to pricing in the second cut by December.”

Wednesday’s report landed mostly in line with economists’ expectations, which was a welcome change from January, February and March, when the CPI (and other inflation gauges) came in hot, hot and hot.

“This is a good report in the context of three warmer-than-expected [CPI] reports, and it makes it look like a potential bump in the road rather than a truly volatile inflation environment,” Tyler Schipper, professor of economics at the University of St. . Thomas in Minnesota, told CNN in an interview.

On a monthly basis, prices rose 0.3%, a slower pace of growth than the 0.4% seen in the previous two months, according to the Bureau of Labor Statistics’ CPI report.

Economists had expected a monthly increase of 0.4% and an annual gain of 3.4%, according to the FactSet consensus estimate.

Rising gasoline and shelter costs accounted for more than 70% of the monthly increase in overall inflation, according to the report.

While high housing costs and high prices at the pump continue to weigh on Americans, Wednesday’s report provided some welcome news on another staple spending area: Retail prices fell for the first time in a year, falling 0.2% from March.

A closely watched underlying measure of inflation shows more progress. Core CPI, which strips out the more volatile energy and food categories, slowed from 3.8% to 3.6%, the lowest rate since April 2021. From the previous month, core CPI rose by 0.3%, the slowest rate since the end of last year.

The price is cool but some pain points remain
In addition to grocery prices falling that month, overall food prices and the cost of going out to eat also decreased. Food price inflation remained at 2.2% annually, while out-of-home food inflation decreased to 4.1%, the lowest rate since May 2021.

New and used car prices continue to fall from record highs; but, especially in this period of high interest rates, it remains an expensive endeavor — not only to buy but also to maintain.

Motor vehicle insurance continued its painful rise in April, rising 1.8% for the month and rising to 22.6% annually. Repair and maintenance costs were unchanged in the month but still running well above overall inflation at 7.6% annually.

Clothing prices surged higher for the month, with some categories such as men’s shirts and women’s suits up nearly 3%.

For those soaring higher at a time when commodity prices are experiencing disinflation (in some cases, outright deflation), could be a reflection of broader trade problems around the world and potential issues for consumers – and incumbents – later this year, said Schipper.

“It may not be so problematic now; but if you think about the fall, when it’s election season, and people are doing back-to-school shopping, that can be a politically problematic category,” Schipper said.

Drift slowly down
However, the April report showed little progress on what has been its biggest Achilles heel: Shelter inflation eased to 5.5%, the lowest annual rate since May 2022.

The cost of housing “has been a fairly persistent area of pain over the last few years,” John Sedunov, professor of finance and real estate at Villanova University, told CNN.

The housing component of the CPI has proven disappointing to economists and other observers because the government’s measurement of shelter costs comes with a sizable lag. Private sector real estate data sources have shown a cooling rental market.

When removing those housing costs from the equation, the closely watched “supercore” index to measure inflation services that exclude shelter costs rose just 0.2% for the month, the slowest rate since last summer.

The Federal Reserve has wanted to see a meaningful process on inflation before it starts cutting interest rates again. The rate is at a 23-year high following a years-long campaign of aggressive rate hikes by the central bank to feed sweltering demand and tame decades of high inflation.

“The last month or two it looked like maybe the increase had stalled, and this [report] looks like it’s continuing at a slow pace,” Erica Groshen, a former BLS commissioner who serves as a senior economic adviser at Cornell University’s School of Industry and Labor Relations, told CNN.

Inflation has eased significantly after peaking at 9.1% annually in June 2022, and the economy remains resilient in the process — despite signs that the pace of rampant spending activity has eased.

A separate report on Wednesday showed US retail sales were flat in April.

“Potentially, that’s an indication that consumers are benefiting,” Sedunov said. “At the end of the day, that retail softening is an indicator that there may be more downward pressure on prices in certain areas going forward, which could have a continuing moderating effect on inflation.”

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