April 2025 CPI Preview
Calm before the storm?
Summary: After a weak inflation reading in March, the CPI likely bounced back in April, though the magnitude is less clear. Easing wage pressures and shelter metrics are expected to lead to more progress on services inflation, but core goods prices pose an upside risk due to tariffs and firms potentially front-running price increases. We point to used autos as a major line item that could boost April CPI and note that the trend of lower energy prices that helped inflation decelerate in recent months could be less helpful now due to an upturn in average April gas prices. Overall, it is hard to get behind a high print this month, as the extent to which firms were able to increase prices this early is unclear.
Market Implication: After several months of heightened uncertainty and market volatility, we finally got some encouraging news on trade negotiations with an official UK deal and an earlier than expected de-escalation with China. Against this backdrop, the market is now pricing just 2 cuts this year (matching the latest Fed SEP dots). This puts us in a challenging place, as the inflation picture could be less of a restraint if tariffs come in lower, giving the Fed less of a reason to wait on cuts. If they truly believe rates are restrictive, they need to start cutting sooner rather than later to get a soft landing. April data was collected before the recent tariff induced volatility, so some producers likely adjusted prices higher in anticipation of higher tariffs. However, given a more encouraging backdrop for other trade negotiations ahead, we think markets would be pleased even if the April CPI print comes in slightly hotter, as it will be unlikely the market goes to pricing in fewer cuts than the Fed. Buy a dip in duration if presented.
