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Inflation stayed high last month, compounding the challenges facing the U.S. economy

A customer shops for meat at a Safeway store in San Rafael, Calif., on April 12, 2023.
Justin Sullivan
Getty Images
A customer shops for meat at a Safeway store in San Rafael, Calif., on April 12, 2023.

Updated May 10, 2023 at 12:46 PM ET

Inflation remained stubbornly high last month after more than a year of rising interest rates.

The Labor Department said Wednesday that consumer prices in April were 4.9% higher than a year ago, a slight slowdown from the 5% inflation rate in March. It was the smallest annual cost-of-living increase in two years.

It's a challenging crossroads for policymakers, caught between persistently high prices and the rising risk of recession.

Although inflation has dropped significantly from a four-decade high last June, it remains well above the Federal Reserve's target rate of 2%.

Prices rose 0.4% between March in April, with prices for housing, gasoline and used cars leading the way.


Housing inflation is expected to decline at some point, but perhaps not as quickly as some had hoped, after a sharp drop in March.

"My feeling is that there's a gradual slowdown here, but March seemed a little too good to be true," said Omair Sharif, president of the forecasting firm Inflation Insights.

The price of used cars and trucks rebounded in April, rising 4.4% from March, after falling earlier in the year. Dealers were forced to pay premium prices at auction this winter to keep cars on their lots.

"Demand picked up unexpectedly around the turn of the year and dealers got caught short," Sharif said.

Airline prices eased last month

Outside of housing and transportation, the cost of services is not rising so quickly, which could be reassuring to inflation watchdogs at the Federal Reserve.

"Once you look through some of these details, I think you actually ought to be feeling better about where things are headed on inflation over the next three to six months," Sharif said.

Airfares fell by 2.6% in April after a 4% jump in March.

"Airports are jam-packed, so it's not that people aren't traveling as much," Sharif said. "But the pressure on air fares from jet fuel costs has receded."

He also thinks airline passengers are nearing the limit of what they're willing to pay.

"There's only so much people are going to bear in how much does it cost to fly from New York to L.A. or Chicago to Miami or whatever," Shariff said.

Gasoline prices rose 3% in April, after falling 4.6% the month before. Food prices were flat during the month, with a drop in grocery prices offset by the rising cost of restaurant meals. Excluding volatile food and energy prices, so called "core inflation" was 0.4% in April and 5.5% for the year.


The Fed faces a tough job

The Federal Reserve has raised interest rates ten times in the last 14 months in an effort to tamp down demand and bring prices under control.

After the most recent rate hike a week ago, Fed policymakers hinted further increases might be unnecessary. But the central bank isn't making any promises about its future steps, given the staying power of inflation and the uncertain economic outlook.

"It's not a business-as-usual macro economy right now," New York Federal Reserve Bank president John Williams said Tuesday. "There's just a lot of churn, if you will, going on in supply and demand."

Williams told the Economic Club of New York he expects inflation to fall to about 3.5% by the end of this year. He thinks the U.S. can avoid falling into recession, but acknowledged recent turmoil in the banking system has added more economic risk.

The failures of Silicon Valley Bank and Signature Bank in March and First Republic Bank last week is making other lenders more cautious about extending credit, which could be a drag on economic growth.

"In February, I had this pretty positive view [that] the economy was going to grow much stronger," Williams said. "That's now offset by a view that we're going to see some slowing in credit," as other banks become more wary about making loans.

The mixed blessing of a strong jobs market

Despite the strains on the economy, the job market remains unusually strong. The unemployment rate is just 3.4%, matching a 54-year low. And last month employers added 253,000 jobs.

But the strength of the job market is a mixed blessing, since rising wages can also contribute to higher prices. Average hourly wage growth accelerated in April to 4.4%.

Fed chairman Jerome Powell said last week he doesn't believe wages are the principal driver of inflation, even if wages and prices tend to move together.

Sharif agrees.

"Wages are definitely pushing up inflation and you could argue that inflation is pushing up wages," he said. "But there's a lot of other elements that are probably playing a bigger role."

Copyright 2023 NPR. To see more, visit https://www.npr.org.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.