Citi: Underlying Core Inflation Nearing Fed Target Despite Methodological CPI Boost
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Citi argues that while April's headline US core CPI print of 0.3761% month-over-month appears robust, underlying inflation trends are actually nearing the Federal Reserve's 2% target. The elevated headline figure was significantly distorted by a methodological quirk stemming from the US government shutdown last October. During the shutdown, the Bureau of Labor Statistics failed to collect rent data, leading to a double-counting catch-up in April that artificially boosted the core CPI by approximately 11 basis points. Stripping out this anomaly, core CPI would have settled at a milder 0.2627%.
Furthermore, core goods inflation continues to demonstrate subdued pricing pressures. April core goods CPI rose by a mere 0.03%, marking the fifth consecutive month below 0.11%. Citi interprets this sustained softness as clear evidence that the inflationary impact of tariff pass-throughs has largely concluded. The core Personal Consumption Expenditures (PCE) index is expected to be noticeably milder, tracking around 0.23% for April.
Citi highlights a notable divergence between CPI and PCE metrics regarding AI-related price indices. The core PCE assigns roughly forty times the weight to computer software and accessories compared to CPI, which artificially inflates PCE goods inflation. Underlying these technical adjustments, Citi maintains that foundational inflation is effectively aligned with target levels. Consequently, the firm anticipates the Federal Reserve will maintain a patient stance on interest rates, awaiting clear signs of labor market weakening before initiating policy easing or validating the sustained moderation in underlying inflation pressures.
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