US Inflation Drops to 3.4% in April

• US inflation resumes downward trend.
• US dollar slides while stock market surge higher.

The US consumer price index (CPI) climbed 3.4% year-on-year in April, down from 3.5% in February and matching the market estimate.

On a monthly basis, CPI rose 0.3% in April, down from 0.4% in March and below the market estimate of 0.4%. The main drivers behind inflation were shelter and gasoline costs, with food prices remaining unchanged.

Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, dropped to 3.6% year-on-year, down from 3.8% in March. Monthly, core CPI dropped from 0.4% to 0.3%. Both readings matched the market estimates.

After the rise in US inflation in the first quarter, the markets gave a thumbs-up to the April inflation report, as the US dollar retreated against the major currencies and the US stock market rose sharply. The drop in inflation has raised expectations that the Federal Reserve will lower interest rates, with the markets pricing in the probability of a September rate cut at 73% after the inflation report, compared to 69% before the release.

The Federal Reserve has stressed that it needs to see inflation drop closer to the 2% target before it will lower rates and the unexpected rise in inflation in recent months delayed plans for a rate cut. The drop in inflation is an encouraging sign but that alone won’t cause the Fed to change the current policy of keeping rates on hold. The surprisingly strong US economy has also prevented the Fed from cutting rates and the Fed is unlikely to start cutting until key economic data such as employment and GDP indicate that the economy is cooling down.

US Dollar Slips, Stock Markets Surge After Inflation Report 

The inflation report has raised expectations of a Fed rate cut, which sent the US dollar sharply lower and US stock markets higher on Wednesday.

The US dollar recorded sharp losses against all the major currencies in the aftermath of the inflation release. The most significant moves were from the AUD/USD currency pair, which climbed 1.01% on Wednesday and the USD/JPY currency pair, which fell 0.98% on the day. The US dollar has stabilized on Thursday at the time of writing.

US stock markets surged on Wednesday in reaction to the inflation report. The Nasdaq 100 Index climbed 273.88 points (1.49%) and closed at 18,596.65. The S&P 500 Index climbed 61.47(1.17%) and closed at 5,308.15.

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