Inflation inched downward in April. What does that mean for investors?

Inflation inched downward in April. What does that mean for wealth management?

May 15, 2024 12:41 PM

Prices rose less quickly in April 2024, including for groceries.

Welcome back to "Crash or Land," the column where Financial Planning checks up on the health of the U.S. economy. When a key new data point emerges, we ask wealth management's sharpest minds one question: Does it bring us closer to a recession or to a soft landing?

On Wednesday an important measure of inflation was released, and it offered a glimmer of hope after months of darkness. In April, the consumer price index rose by 3.4% from one year ago — down from 3.5% in March.

The decline is marginal, but it ends a streak of increases. From January to February, the CPI rose from 3.1% to 3.2%, and in March it jumped another 0.3%.

In April, consumers finally got some small measure of relief. Grocery prices rose by 1.1%, down from 1.2% in March. Gas prices climbed by 1.2%, down from 1.3%. And rents ticked up by 5.5%, down from 5.7%.

The April downshift eases pressure on the Federal Reserve, which has raised interest rates to historic highs to tame rising prices. That tactic appeared highly successful at first, bringing the CPI down from 9.1% in June 2022 to 3% in June 2023. But since then inflation has remained stubborn, with the CPI hovering above 3% for almost a year.

The Fed's own preferred inflation measure, the personal consumption expenditures (PCE) index, has also shown little movement. "Core" PCE, which strips out volatile food and energy prices, was stuck at 2.8% in both February and March — above the Fed's 2% target.

Earlier this month, Fed Chair Jerome Powell admitted the recent data had affected his outlook.

"I would say my confidence is not as high as it was, having seen the readings in the first three months of the year," Powell said at a banking conference in Amsterdam.

Late last year, the Fed signaled that it planned to cut interest rates three times in 2024. But amid months of discouraging data, those cuts have yet to arrive. In May, the central bank once again held the federal funds rate between 5.25% and 5.5%, where it's been since August.

But on Wednesday morning, Wall Street appeared hopeful that cuts were back on the table. News of the April numbers sent stocks soaring, with both the S&P 500 and the Nasdaq jumping to record highs.

Apart from those short-term gains, how else might the changing inflation picture affect wealth management? Are interest rates more likely to come down? If so, which investments are likely to benefit, and which ones are likely to take a hit? And in general, is the economy closer to a soft landing or further away — or in roughly the same place?

For answers, we turned to some of the most prominent analysts on Wall Street. Here's what they said:

Good for both stocks and bonds

Bret Kenwell, U.S. investment analyst at eToro

"April's in-line inflation report is good news for investors. With a series of higher-than-expected reports to start the year, investors were beginning to worry about reflation taking hold. The Fed's No. 1 enemy has been inflation, and while we're not necessarily out of the woods, a tamer inflation report is certainly a positive.

"The not-too-hot report should boost investor confidence that we could see more than one rate cut from the Fed this year, which should be a positive for equities. Coming into 2024, the bond market was pricing in upwards of six rate cuts this year. Now teetering between one or two cuts, an in-line inflation report should tip the scales toward the latter, while potentially allowing the discussion for three cuts — in-line with the Fed's prior dot plot outlook — to gain some traction.

"This report — along with a weaker-than-expected retail sales report — should increase the odds of looser financial policy from the Fed. That should be a positive for stocks overall, as well as bonds and rate-sensitive equity sectors like real estate and consumer discretionary."

More hope, but no guarantees

Jeffrey Roach, chief economist at LPL Financial

"This report gave us some good signs that services inflation is easing. Grocery prices fell in April, giving some relief, especially for those buying meats, fruits and vegetables.

"The 'soft landing' narrative is still a possibility but not a guarantee. Markets will be looking for more confirmation, and the weak retail sales report did not help.

"Commodities could benefit from this period of sticky inflation, especially while we have supply and demand imbalances.

"Despite this morning's encouraging inflation report, the Fed will not likely begin cutting rates until they have more confirmation that consumer prices are easing. After digesting this report, markets expect the first cut to come in September."

Delayed but not derailed

Alexandra Wilson-Elizondo, co-chief investment officer of multi-asset solutions business at Goldman Sachs

"Retail sales and CPI prints gauge the health of both economic growth and the disinflation narrative. There was a lot lying on today's CPI print to prove that disinflation was simply delayed these last three months and not derailed. Our view was that the U.S. inflation spike prior to today's release was more noise than signal, but the breadth of upward surprises in components was cause for concern.

"Today's data shows gradual moderation in shelter inflation, and core services showed sequential declines, reaffirming our view. Retail sales came in weaker on the control group, and past months were revised down, suggesting a slowing in the consumer spending that we had already observed in other data points. In combination, the data points should keep the Fed market friendly, but we will be keenly observing labor market data for insights into consumer psychology going forward as well as Fed directionality."

Soft landing ahead

Brian Rose, senior U.S. economist at UBS Financial Services

"In our view, today's data supports our base-case soft landing scenario. Both inflation and consumer spending appear to be cooling off, but at least so far, nothing in the data suggests that the economy is heading for a hard landing. We maintain our view that the Fed will start cutting rates in September, and this should lead to lower bond yields by year-end. In our investment strategy, we maintain a preference for quality bonds."

Don’t get your hopes up

Roger Aliaga-Diaz, global head of portfolio construction at Vanguard

"Although recent upside surprises can't continue forever, we think the market is underestimating the medium-term ability of labor markets and consumer demand to keep prices growing. Until we observe meaningful signs of deterioration in either the labor or housing markets, we expect continued stickiness in inflation measures accompanied by volatility in monthly data."