• This morning’s CPI report came in hotter than expected with headline and core CPI rising by 0.3% and 0.6% respectively compared to consensus expectations of gains of 0.2% and 0.4%.

• Part of the reason for the higher than expected inflation was a record 18.6% monthly gain in airline fares as travel demand increased. Hotel rates also climbed sharply rising 2.0% for the month.

• Food at home prices rose by 1.0% reflecting higher prices for basic items including milk (+3.1%), eggs (+10.3%) and chicken (+3.0%).

• Consumers did see some relief with declines in the prices of energy (-2.7%), apparel (-0.8%) and used vehicles (-0.4%).

• The effect of rising rents and wages, which should linger, was evident in a 0.5% rise in shelter costs and a 0.9% increase in the price of full-service meals and snacks.  

• Even with today’s stronger-than-expected data, year-over-year headline inflation fell from 8.5% in March to 8.3% in April while year-over-year core inflation fell from 6.5% to 6.2%.

• We expect that these numbers will translate into year-over-year declines in the Fed’s preferred inflation measures with the personal consumption deflator rising 6.4% year-over-year in April compared to 6.6% in March and the core consumption deflator rising 5.0% year-over-year in April compared to 5.2% in March.

• While inflation remains well above the Fed’s 2% target, we expect some further moderation in the months ahead.

• Moreover, very significant braking power is being applied to the economy with a record high trade deficit funneling demand overseas, a likely record decline in the federal deficit for 2022 applying huge fiscal drag and a 2% increase in mortgage rates since the start of the year cooling demand in the housing market.

• We expect economic growth to slow sharply in 2022 compared to 2021 with supply chains generally improving. This should provide inflation relief and consequently we expect that the Fed will gradually moderate its recently hawkish tone, despite today’s hotter-than-expected report, thus providing support for recently battered U.S. fixed income and equity markets.

David Kelly is chief global strategist at J.P. Morgan Asset Management.