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Monthly Economic Insights

Inflation is falling. Is the Fed done raising rates?

The Fed has raised its federal funds rate rapidly over the past year to fight inflation, most recently to a range between 5% and 5.25%, a 16-year high.

And it just might be working, as inflation fell again for the fourth month in a row, to 4.9% in April, down from 5.0% in March. While it’s not a large move, it is significant for its consistency and there are good reasons to believe it may continue. 

One reason is that increases in Shelter (rent and owners’ equivalent rent) which counts for nearly 35% of the total inflation calculation (43% of core inflation) slowed for the third month in a row to just 0.4% (4.8% annualized), down from 0.6% and 0.8% in March and February (or 7.2% and 9.6% annualized), respectively.

Another correlating data point to support this is that rent growth peaked 12 months ago, and new leasing signings are now reflecting slowing rent hikes. Good news for renters as well as the rest of the economy.

This positive inflation news points to a possible pause in Fed rate hikes, at least for June. On the flip side, the labor market remains strong as 253,000 new jobs were added in April, bringing the unemployment rate back down to 3.4% or a 53-year low.

However, we continue to see the ratio of job openings (JOLTS) to those unemployed fall which now stands at 1.6 or down from 2.0 job openings per unemployed individual last year, which means jobs are becoming less abundant.

Bottom Line: The Fed’s decision to raise interest rates at its meeting next month is shaping up to be a close call. Straw polls of various policymakers seem to be split evenly between those who would support another increase and those who would not.

What would cause a pause? Fed officials are looking for more evidence that inflation is firmly on track to reach the central bank’s 2% target. But inflation hawks simply aren’t convinced the positive inflation numbers are here to stay because much of the recent improvement in inflation has come from falling energy prices. Moreover, tight labor markets could still spur income and spending growth that could in turn contribute to higher inflation.







— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company


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