AS inflation is cold fear when climbing tariff services and softer

US CPI rose 0.2% month to month for the main headline and core in April, under the expected 0.3% reading. This means that the headline inflation dropped to 2.3% years-to-year from 2.4%, which was the lowest reading since February 2021, while the core-ex food and energy-setap at 2.8% yoy.

The details show a decrease in the tariff of the third airline (-2.8% mother/-7.9% yoy) while the price of used cars dropped 0.5% and clothing dropped 0.2% and the price of food dropped 0.1% of the mother. The offset strength in this medical maintenance service (+0.5%Mom) and medical care commodity (+0.4%) plus a large increase in motor vehicle maintenance (+0.7%) and vehicle insurance (+0.6%).

The component of the shelter, which forms 35.4%of the inflation basket based on weight also continues to run at a high level of 0.3%mom/4.0%yoy, but the good news is the main indicator, such as the Cleveland Fed new tenant, falling in terms of yoy and shows, based on historical relationships, that housing costs will slow down sharply/ that housing costs will slow down sharply at the beginning of this year.

The threat of receding tariffs must calm worries
In addition, it is important to remember that US inflation baskets are dominated by services. The ex -food and energy commodity, which is most influenced by tariffs, is only 19.4% of the product basket and service used to calculate inflation. Therefore the story of housing and service can help reduce the threat of inflation from tariffs, which naturally lack attention after cooling the new tension with China.

This softer service inflation narrative also seems to be a message from the current NFIB survey about small businesses, which shows withdrawals in the proportion of companies that currently raise their prices to 25% compared to 31% in February and those who hope to raise their prices over the next three months to 28% from 30% two months ago.

So, while the de-escalation of trading tension is very helpful for growth, it also makes it more likely that inflation will be less problems for the federal reserve and the scope for cutting interest rates remains. We have been looking for Fed to wait until September before being cut and it is still valid, but instead of starting with 50bp discounts, it seems more likely to be a step 25BP.
Source: Ing