April '25 CPI Inflation Report: Another Very Encouraging Month, But Will It Last?

April's CPI report was released yesterday morning, and similar to March, it again showed very benign inflation in the economy. With all of the tariff whiplash of the last several months though, the obvious questions are: can this subdued inflation continue? And if so, for how long? While we won't be making any forecasts about that, let's go through the April report to get a better sense of where we stand today. This is especially important given this will likely be the last "pre-tariff" CPI report, although this one probably wasn't entirely squeaky clean of tariff impacts either.

For the month of April, both headline (which includes food and energy) and core CPI (which excludes those two items) increased 0.2% month-over-month, seasonally adjusted. This was relatively in-line with consensus expectations, but if anything, surprised slightly to the upside, considering unrounded core CPI was up 0.17%, and considering how we got there was encouraging too (more on that in a minute). Year-over-year, headline CPI increased 2.3% in April, down slightly from the 2.4% in March. This was the smallest year-over-year increase in headline CPI since February 2021 (when the economy was still very much mired in COVID). Core CPI increased 2.8% year-over-year in April again, similar to March. Below is our usual table and a chart to put things in perspective.

Besides the headline CPI figure being the lowest its been since February 2021 this month, considerably benign core inflation inflation the last few months has put the 3 month annualized core rate at 2% as well.

Now let's assess how we got here by looking at core inflation through our three "buckets": core goods, core services excluding shelter, and shelter.

Core goods contributed +1 bps of the total +17 bps to core CPI this month. Most goods categories were quite benign, though used car prices were a tailwind again this month (albeit slightly...1 bps tailwind this month versus 2 bps last month). New vehicle prices did not contribute anything this month, which was generally the case for each of the last four months as well. Given the tariffs on autos and their component parts seem to be more of a focus of the new Administration, we'll have to keep a keen eye on these categories in coming months.

Core services ex. shelter, or "super core," as the Fed sometimes refers to this bucket as, showed very encouraging levels of inflation again in April, just as we've seen for the last three months. This month, core services contributed only 3 bps to core inflation. Though this was above the -2 bps we saw from core services last month, it was favorable versus February (+5 bps), and below the pre-COVID average of +7 bps as well. Airline fares continue to be helpful in this regard (3 bps tailwind this month, 6 bps last month, and 5 bps in Feb), but even excluding airfares, we'd be slightly below the pre-COVID average. Services inflation excluding rent is very much back to levels consistent with the Fed's 2% inflation target. Absent a much tighter labor market again (like we saw in 2021 and 2022), this feels like one of the components of core inflation that we can feel good about sustaining going forward, tariffs or no tariffs.

Let's now turn to our last bucket, which is shelter costs. After ticking down last month, CPI shelter costs have again returned to above pre-COVID levels of increases. This is despite (as we'll show in a moment) the litany of private market data indicating the housing and rental markets remain in the gutter. This month, CPI shelter contributed +13 bps of our +17 bps total core figure. As noted above, this was above last month's +9 bps contribution, and also slightly above the +11 bps figure shelter contributed pre-COVID as well.

Let's now turn to looking at inflationary breadth. We do this by looking at larger groups of categories of goods and services to see how the median and averages within these categories are inflating. This helps adjust out for different weights in the CPI, and can give us a better sense of underlying inflationary pressures in the economy. If more categories of goods and services are inflating at above the levels of what the aggregate index is indicating, that means the index's weights are putting downward pressure on inflation. If the opposite is happening, then there's probably less upward inflationary pressure (or breadth) in the economy than we might think.

This month, the median and average increases for Category Level 4 and 5 were 0.10%, 0.13%, 0.10%, and 0.07% respectively. All of these levels are consistent with inflation below 2%, and indicate that inflationary breadth in the economy is lower than what the aggregate headline and core indices are telling us. The charts below indicate that this has generally been the case for some time. This tells us that the weights of the index's components (primarily shelter's) are indicating inflation in the economy is higher than it really is (this occurs when the lines are below the bars in the below charts). When the lines themselves are around 0.20%, that is indicative of inflationary breadth consistent with 2% inflation (0.2% on a monthly basis would produce about 2.4% inflation on an annualized basis, which, when adjusted for CPI / PCE differences that we've talked about in other posts, would put us pretty close to the Fed's 2% inflation target).

Now let's look at the same category level data on a 3 month annualized basis. This helps smooth out some of the monthly volatility. As you can see, the story remains the same, though thankfully with CPI shelter starting to finally normalize, the bars (index) are now indicating that we're generally at our 2% inflation target as well, just as the category level (lines) data has been indicating for (at least) the better part of a year now.

Let's now turn to one other exercise, which substitutes private market rent and shelter data for CPI's Shelter Index data. As we've talked about in prior posts, we do this because of the methodology the CPI uses to calculate shelter inflation, which produces a significant lag relative to actual shelter prices on the ground. The below chart shows the year-over-year changes in various private market shelter price trackers relative to what the CPI is telling us shelter inflation is (dark blue line). The takeaway here is that most other data sources that are tracking shelter costs in the real economy have been telling you shelter prices are decreasing, not increasing, for the better part of the last two years. In April's CPI data, however, the government is telling us shelter prices in the real economy are increasing at a 4% rate. That is a huge gap, and one that has significant implications for what total inflation in the economy is.

Private data providers continue to show shelter inflation well below CPI levels, and when it comes to apartments, rents have been declining for the better part of 24 months.

If we take an average of the private market data's year-over-year changes then, we can substitute that into the CPI in place of the CPI's own Shelter Index. When we do this, it not only produces core CPI below the Fed's 2% target, but it produces core inflation less than 1%, or half the Fed's target.

Using the private market shelter data mentioned above in place of the CPI's Shelter Index, core inflation remains considerably below where the BLS is indicating. For yet another month, "market-based" shelter-adjusted core CPI stands at below 1% on a year-over-year basis.

In conclusion, April's CPI data was another very encouraging month when it comes to assessing the state of inflation in the US economy. To put it in terms we've done in the past, we simply do not have an inflation problem in this country anymore. Goods inflation has normalized, core services inflation has normalized, and the reality on the ground tells us that shelter prices have normalized as well. All that's left is for the government data to catch up. Even egg prices, which became a borderline national obsession for the better part of the last 6-8 months, have now dropped considerably.

All this being said, while things are about as good as we could expect on the inflation front today, this feels poised to change relatively soon, largely due to tariffs of course. For now, it seems possible that the tariffs may have actually had a deflationary impact on the economy, simply due to the slowdown in economic activity they almost definitely caused in March and April. This slowdown in growth seems to have carried through to prices (when businesses see lower demand, they tend to have less pricing power). If tariff policy is indeed easing, however, or if it just hasn't fully kicked in yet (meaning lower levels of tariff just haven't fully kicked in yet), businesses may feel better about passing through tariff cost increases that they do end up seeing in coming months. Time will tell on this, so we'll be keeping a close eye in coming months.