Inflation is decelerating – we are at a two-year low.

Investors got some good inflation news after one popular measure of U.S. consumer prices increased less than expected in April. The Labor Department reported the consumer price index (CPI) rose 4.9% in April, down from 5% in March. On a monthly basis, the CPI was up 0.4% compared to March. The last time CPI inflation was below 5% was June 2021. The April CPI reading is only the latest indicator that U.S. inflation is falling, which may allow the Federal Reserve to pause its campaign of rate increases. The April CPI reading continued the positive inflation trend after year-over-year CPI inflation pulled back from 6% in February to 5% in March. Core inflation, which excluded volatile food and energy prices, was up 0.4% on a monthly basis and 5.5% from a year ago. Economists had expected annual core CPI inflation of 5.5% in April. Food prices were flat month-over-month and up 7.7% compared to a year ago. Energy prices were up 0.6% on a monthly basis and are down 5.1% over the past 12 months. Used car prices were up 4.4% compared to March and down 6.6% compared to April 2022. The latest CPI numbers come after the Labor Department reported the U.S. economy added 253,000 jobs in April, exceeding economist expectations of 180,000 new jobs. The Labor Department reported U.S. wages were up 4.4% year-over-year in April, while the unemployment rate dropped to a 50-year low of 3.4%. The April CPI reading is yet another positive datapoint for Americans hoping price deceleration has begun to pick up steam following a U.S. regional banking crisis in March and April that tightened credit markets. U.S. GDP growth also slowed to just 1.1% in the first quarter. In late April, the Commerce Department reported the core personal consumption expenditures (PCE) price index was up 4.6% in March, a slightly slower pace than its 4.7% year-over-year gain in February. Core PCE is the Federal Reserve’s preferred inflation measure. Inflation has been the Fed’s economic enemy number one since early 2022, and the Federal Open Market Committee has made aggressive changes to U.S. monetary policy in an attempt to bring inflation down toward its long-term target of just 2%. In May, the FOMC raised its target fed funds interest rate by 25 basis points (bps), its tenth consecutive interest rate hike. Since March 2022, the Fed has raised its target fed funds rate by 5%, to its current range of between 5% and 5.25%. The Fed hinted that it could pause its rate hikes at its upcoming meeting on June 13-14. The April CPI numbers likely ensure a Fed pause is a real possibility in June. According to CME Group, markets are currently pricing in an 80.4% chance the Fed will maintain its current target rate range in June and just a 19.6% chance of another rate hike. The market is also pricing in a 59.1% chance the FOMC will pivot to rate cuts by September. Quincy Krosby, chief global strategist for LPL Financial, says the April CPI report is a relief to investors. “Today’s report suggests that the Fed’s campaign to quell inflation is working, albeit more slowly than they would like,” Krosby says. The Fed is raising interest rates aggressively to bring down inflation but also trying not to spark a U.S. recession. Rising interest rates increase borrowing costs for companies and consumers, weighing on economic activity. Up to now, the U.S. labor market has been solid. However, S&P 500 earnings are down 2.2% year-over-year in the first quarter, and Wall Street is concerned the economy may not take spiking interest rates in stride. Krosby anticipates inflation will continue to fall in May. “Expectations are that rent-related inflation will indicate definitive signs of easing, helping to push overall headline inflation lower,” she says. Brad McMillan, chief investment officer for Commonwealth Financial Network, says economic data from April was generally positive for investors. “While we face risks, with the debt ceiling at the top of the list, the solid results from April mean the prospects for the rest of the year continue to look good,” McMillan says. “That is the bottom line here: while we do have headwinds, the current economic slowdown and adjustment in interest rates could put the economy and markets in a better place.”