April CPI Softens Modestly, Easing Market Nerves but Not Shifting Fed Policy Yet

The April Consumer Price Index report landed just shy of expectations, offering a modest dose of relief to markets that have grown increasingly anxious over the inflationary implications of re-emerging tariffs and persistent services inflation. Headline CPI rose 0.2% month-over-month, below the consensus forecast of 0.3%. Core CPI, which strips out the volatile food and energy components, also came in at 0.2%, matching March’s upwardly revised reading and slightly softer than expectations.

On a year-over-year basis, headline inflation now stands at 2.3%, down from 2.4% in March, marking the lowest 12-month increase since February 2021. Core inflation held steady at 2.8% annually. These numbers aren’t enough to move the Federal Reserve’s policy stance, but they are supportive for the dovish camp that continues to argue the path toward price stability is intact—if bumpy.

Markets responded in kind, with equity futures pushing higher as traders maintained bets on two interest rate cuts by year-end, the first expected in September. But while this report helps calm some nerves, it’s clear that one benign data point won’t change the Fed’s trajectory just yet—especially with tougher year-over-year comparisons looming in the summer.

Shelter Inflation Remains the Core Concern

The biggest contributor to April’s price gains was once again shelter, which rose 0.3% month-over-month. That increase accounted for more than half of the total rise in headline CPI. Within shelter, the rent index climbed 0.3%, and owners’ equivalent rent—an imputed measure of housing cost—was up 0.4%. On a year-over-year basis, shelter prices are up 4.0%, making it the stickiest and most persistent component of inflation.

With shelter prices lagging real-time measures such as Zillow or Apartment List, which show lower rent increases, this component is expected to decelerate later in the year. However, for now, it continues to anchor the inflation narrative.

Relief at the Grocery Store, But Not the Restaurant

One of the most notable shifts in April came from food prices, which declined 0.1% on the month. Grocery prices (food at home) fell 0.4%, the largest drop since September 2020. Five of six major grocery categories saw declines. Eggs plummeted 12.7%, helping pull down the broader meats, poultry, fish, and eggs category by 1.6%. Fruits and vegetables fell 0.4%, cereals and bakery products dropped 0.5%, and dairy slipped 0.2%.

However, food away from home told a different story. Restaurant prices rose 0.4%, as full-service meals climbed 0.6%. Year-over-year, dining out is up 3.9%, compared to just 2.0% for food at home. This divergence underscores a bifurcated consumer—more price-sensitive at the grocery store, but still willing to spend on convenience and experiences like eating out.

Energy Prices Rebound Modestly

After falling 2.4% in March, energy prices rose 0.7% in April. The natural gas index jumped 3.7%, and electricity increased 0.8%. Gasoline prices, on a seasonally adjusted basis, were down 0.1%, though they rose 2.9% unadjusted—signaling that price pressure may build in May’s report.

On a year-over-year basis, energy remains deflationary, down 3.7%. Gasoline is off 11.8% from a year ago, while fuel oil is down 9.6%. However, the trend in electricity (+3.6%) and natural gas (+15.7%) suggests input costs may still be working their way through utility bills, and potentially supply chains.

Core Goods and Services: Mixed Signals

The index for all items excluding food and energy rose 0.2% for the second month in a row. There were some notable increases in service categories: medical care (+0.5%), motor vehicle insurance (+0.6%), and household furnishings (+1.0%). Medical inflation, in particular, bears watching, with hospital services up 0.6% and prescription drugs up 0.4%.

On the flip side, disinflationary forces were visible in several consumer discretionary categories. Airline fares dropped 2.8% after falling 5.3% in March. Used cars and trucks fell 0.5%, apparel was down, and communication services also declined. These trends suggest softening demand or normalization in post-pandemic price spikes.

Consumer Behavior: Prioritizing Essentials, Trimming Extras

The report reflects a consumer pivoting toward essentials while showing restraint on discretionary goods. The drop in grocery prices may reflect discounting by retailers trying to stimulate foot traffic, while continued restaurant inflation implies steady demand for convenience. Declines in categories like used cars, airfares, and apparel suggest households are tightening the belt in non-essential areas.

Tariff Watch: Not in the Numbers Yet, But Coming

Although this is one of the first CPI prints since the Trump administration implemented tariffs, the inflationary impact hasn’t yet filtered through broadly. Energy input costs and insurance may be early signals of supply chain pass-through, but core goods—where tariffs tend to bite—remain benign for now.

The real test may come in Q3 as base effects firm and tariff exclusions expire or are reinstated. With year-over-year comparisons set to get tougher, even modest inflation prints in future months could feel heavier.

Bottom Line

April’s CPI report offers modest relief but is unlikely to spark a policy shift on its own. The data show a cooling in core pressures and some early disinflation in consumer goods. But shelter and service inflation remain persistent, and new trade policy uncertainty could rekindle pricing pressures. For the Fed, the path forward remains unchanged—for now. For markets, though, today’s numbers buy some time, and that’s enough to extend the rally, at least temporarily.