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US stocks close at record high on slower pace of inflation

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US stocks closed at a record high after data showed inflation had fallen slightly to 3.4 per cent in April, prompting traders to increase their bets on Federal Reserve’s interest rate cuts this year.

The consumer price index data released by the US labour department on Wednesday was in line with economists’ expectations. It compared with March’s rate of 3.5 per cent and ended a four-month streak in which inflation outstripped expectations.

“It is something of a relief that for the first time this year, CPI did not come in higher than forecast,” said Eric Winograd, senior economist for fixed income at AllianceBernstein.

Traders in the futures market reacted to the report by fully pricing in the possibility the Fed would lower interest rates twice this year, having on Tuesday priced in between one and two cuts.

US stocks set new peaks on the news while government bond yields fell. The S&P 500 closed 1.2 per cent higher, chalking up its first record closing high since late March and leaving the blue-chip index 11.3 per cent higher this year. The tech-heavy Nasdaq Composite climbed 1.4 per cent for its second record in as many days.

The two-year Treasury yield, which moves with interest rate expectations, initially dropped to 4.71 per cent — its lowest level since early April. It later retraced some of that to be 0.09 percentage points lower at 4.73 per cent in late-afternoon trading.

There were also encouraging signs on price pressures in Europe, after the EU said earlier in the day that it estimated inflation to drop faster this year than expected. The region’s Stoxx 600 equities benchmark gained 0.6 per cent to close at a record high.

The figures come a day after Fed chair Jay Powell warned the US central bank may have to maintain high interest rates for longer as it struggles to tame persistent inflation.

After Wednesday’s data, Winograd cautioned that “there is nothing in here that tells us that inflation is going to come down to the Fed’s [2 per cent] target in the near term”.

The central bank bases its inflation target on the personal consumption expenditure index, which was most recently shown to be up 2.7 per cent in March from a year earlier.

With less than six months to go before the US election, high inflation has hit President Joe Biden’s poll ratings on the economy. Even though the annual CPI has declined sharply since hitting a peak of his presidency in 2022, many voters are still unhappy with the higher price levels for many goods.

“Today’s inflation number will be seen by some as progress and by others as a sign that inflation is still a problem,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan, whose monthly poll with the Financial Times has shown persistent dissatisfaction with inflation this year. “It probably is not good enough news for the Biden campaign but it could have been a lot worse.”

According to Wednesday’s figures, core consumer prices — which strip out volatile food and energy costs — rose 3.6 per cent last month compared with last year. This marked the lowest rate since April 2021.

On a monthly basis, the core CPI rose 0.3 per cent in April, compared with increases of 0.4 per cent during the previous three months.

Ryan Sweet, US economist at Oxford Economics, called the data “a very small step in [the] right direction” though “we would need to string together two or three more months of this before you start to hear the Fed sound more confident”.

In the April data, shelter inflation remained high at 5.5 per cent on an annual basis — while monthly increases were steady at 0.4 per cent — as housing costs continued to be one of the main drivers of inflation. But monthly price gains in transportation services and medical care eased, while they remained steady in energy. Food prices were flat on a monthly basis and were up 2.2 per cent over the past year.

The slightly cooler inflation data follows labour market figures for April that showed a slowdown in job creation — which will also give the Fed more confidence that the US economy is not experiencing a new acceleration.

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