After slight deflation in March, prices rose again in April. The Bureau of Labor Statistics (BLS) reports that the Consumer Price Index (CPI) increased 0.2 percent last month. Over the past year, it rose 2.3 percent. “The April change was the smallest 12-month increase in the all items index since February 2021,” BLS notes. This is welcome news for those of us hoping for continued disinflation.
Shelter prices increased 0.3 percent last month, “accounting for more than half of the all items monthly increase.” That’s because shelter makes up a large part of the CPI—nearly a third of the index, approximating its share in the average household’s budget. Also, energy prices increased sharply. They’re up 0.7 percent on the month, driven primarily by natural gas and electricity. There’s likely a significant seasonality component here.
Core CPI, which excludes volatile food and energy prices, rose 0.2 percent last month and 2.8 percent last year. This is the slowest it has grown since March 2021. Again, this is evidence of persistent disinflation.
The Federal Open Market Committee (FOMC) recently decided to keep the target for the Fed funds rate range unchanged. It’s still 4.25 to 4.50 percent. Adjusting for inflation using the twelve-month headline CPI figure yields a real fed funds target range of 1.95 to 2.20 percent. Alternatively, adjusting for inflation using the annualized three-month headline CPI figure of 1.6 percent yields a real fed funds target range of 2.65 to 2.90 percent.
Let’s consult the Fed’s estimates for the natural rate of interest to see whether current market rates represent appropriate monetary policy. The New York Fed puts the natural rate of interest between 0.80 and 1.31 percent in 2024:Q3. The Richmond Fed lists a much larger range: 1.15 to 2.61 percent, with a median of 1.86 percent. The real federal funds rate target range is above the New York Fed’s estimates and the Richmond Fed’s median estimates, regardless of whether the twelve-month or three-month CPI measure is used. The real federal funds rate target range constructed from the twelve-month CPI measure is below the upper end of the range offered by the Richmond Fed, while the range constructed from the three-month CPI measure exceeds it. Taken together, the interest rate evidence suggests monetary policy is somewhere between neutral and tight.
We should also consult monetary data, comparing money supply growth to money demand growth. The M2 money supply is up 4.18 percent over the past year. Broader liquidity-weighted measures are rising between 3.41 and 3.51 percent per year. On the other side of the market, we have money demand, which we can proxy by adding US population growth to real GDP growth. Population growth is about 1 percent, whereas real GDP growth is about 2.05 percent. Hence money demand is growing roughly 3.05 percent per year. All measures of the money supply are rising faster than this, suggesting loose money. This is an interesting divergence from the picture we get from interest rate data.
The discrepancy comes down to a statistical quirk. Although real GDP is still growing on an annualized basis, it actually shrank a bit in 2025:Q1. The reason was a temporary surge in imports, as households and businesses tried to get ahead of impending tariffs.
But this doesn’t actually mean the US economy is poorer. Domestic spending on consumption and investment remained strong. Some spending was temporarily diverted to foreign production rather than domestic production, in anticipation of tariff-induced price hikes. A single quarter’s decline in measured production isn’t a reliable indicator of a coming recession.
Especially when it comes to categorizing imports, we should be careful not to confuse accounting conventions for economic analysis. Furthermore, many analysts predict a return to growth next quarter. The Wall Street Journal’s forecasting average is 0.8 percent growth in 2025:Q2. Money demand is likely growing more rapidly than we think. The money supply is probably increasing as fast as it ought to.
The FOMC was right to keep rates where they are. Monetary policy is probably slightly tighter than neutral, which is where we want it to foster broad-based disinflation without damaging the economy. As always, we need to pay attention to future data releases, especially the Fed’s preferred price index, called the Personal Consumption Expenditures Price Index (PCEPI). But policy looks approximately correct for now. Given the Fed’s monumental errors in recent years, we should be grateful it’s getting up to speed.
