US inflation report boosts hopes for interest rate cuts

The Federal Reserve received encouraging news in its inflation battle on Wednesday, as a government report boosted hopes that the US central bank could cut interest rates this year.

The Labour Department reported Consumer Price Index (CPI) inflation rose 3.4 per cent on an annual basis, still well above the Fed's long-term 2 per cent target.

Inflation rose 0.3 per cent on a monthly basis after a 0.4 per cent gain in March.

Major stock indexes climbed to record-highs on Wednesday after the CPI report.

The Dow Jones Industrial Average hit 39,914 before closing at 39,908.

The S&P 500 hit 5,300 for the first time, while the Nasdaq Composite climbed 1.40 per cent.

Core inflation, which excludes food and energy prices, rose 3.6 per cent, its lowest level in three years.

Wednesday's report comes after a series of higher-than-expected inflation figures dented confidence in Fed officials, who said it was moving down towards its target, pushing back expectations of US rate cuts.

With traders shifting rate-cut expectations to September, it could also signal a delay in rate cuts for the UAE and Saudi Arabia, whose central banks closely watch the Fed's decisions.

Speaking on Tuesday, Fed chairman Jerome Powell said he expects inflation to climb back down, adding that "[we] need to be patient and let restrictive policy do its work”.

The Fed has kept its target range steady between 5.25 per cent and 5.50 per cent since the summer.

“I expect that inflation will move back down on a monthly basis to levels that were more like the lower readings that we were having last year,” Mr Powell said in Amsterdam.

Economists believe Wednesday's report should return some level of confidence for Fed officials.

“That said, we think it will take more than just one solid CPI report to induce the first rate cut,” Wells Fargo economists Sarah House and Michael Pugliese wrote in a note to investors.

"We believe it will take at least a few more benign inflation readings for the Federal Open Market Committee to feel sufficiently confident to begin lowering the fed funds rate."

Nigel Green, chief executive of the deVere Group, believes markets are too optimistic and that it will take months before Fed officials reach the confidence necessary to begin rate cuts.

“As such, we still expect there’s a considerable risk that they will not feel comfortable about cutting rates before 2025,” he said.

Meanwhile, a report from the Commerce Department showed retail sales were flat last month, adding to concerns that consumers are feeling the burden of sticky inflation and higher borrowing costs.

But Michael Pearce, chief US economist at Oxford Economics, said the stagnated numbers are not a cause for concern.

“The resilience of the economy frees the Fed to focus on the incoming inflation data to guide its rate decisions, which we think will improve over the coming months and prompt the Fed to begin gradually easing rates beginning in September,” he wrote.