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Inflation eased and the stock market rallied in April

JUANA SUMMERS, HOST:

Some good news about the cost of living - inflation eased last month. That means people who have been feeling stretched by the double-whammy of high prices and high borrowing costs could soon feel something else - a little relief. The stock market rallied on the news. Investors are hoping the report will help clear the way for lower interest rates. NPR's Scott Horsley joins us now. Hi, Scott.

SCOTT HORSLEY, BYLINE: Hi, Juana.

SUMMERS: So Scott, the last few inflation reports had been surprisingly hot, but that is not the case today. So tell us - what does this new report show?

HORSLEY: It tells us that April brought a cooling shower to the nation's overheated inflation rate. Prices last month were up just 3.4% from a year ago. That's a smaller annual increase than the month before. Some of the welcome relief came from the supermarket. Grocery prices actually fell in April for the first time in a year. Egg prices tumbled more than 7% last month - too late to help with Easter, unfortunately, but good news for breakfast lovers.

Gasoline prices were up for the month, but so-called core inflation, which strips out those volatile food and energy costs, was the lowest it's been in three years. Elizabeth Renter who's a senior economist at NerdWallet, says this is reassuring after several months when it looked like inflation might be stuck at a too-high level.

ELIZABETH RENTER: I think today's report underscores that it was likely a pause and that we are continuing to move in the right direction.

HORSLEY: If that moderation continues, investors think the Federal Reserve might be ready to start cutting interest rates this fall. That was enough to boost the Dow Jones Industrial average by about 350 points today, and all the major stock indexes closed at record highs.

I will add a note of caution, though. We're not out of the woods yet. Prices are still going up faster than most of us would like and faster than the Federal Reserve's target.

SUMMERS: Remind us, if you can - what is keeping inflation from falling further?

HORSLEY: Well, one big sticking point is still housing costs, which make up an outsized chunk of the consumer price index - more than a third. Housing has been a big driver of inflation for months now, even though actual market rents are not going up nearly as fast as they were a couple of years ago. We keep waiting for the slowdown that we're seeing in market rents to show up in the official government data, and it's taking a long time.

Now today's report also shows higher prices for services, like haircuts and restaurant meals and car insurance, and those service prices are probably going to have to settle down a little bit more for the fed to feel confident that inflation is under control.

SUMMERS: Scott, how are Americans feeling about their buying power? We talked yesterday, and I remember we were talking about how overwhelmed with credit card debt max out some people are.

HORSLEY: Yeah, we got some clues from another report today. It shows that retail sales were flat in April after a big jump the month before. With those rising gas prices, people did spend more money at the gas station last month. But they spent less at a lot of other stores, and internet sales were also down.

Now, some of that could be noise. You know, Easter came early this year, so people might have done some of their Easter shopping back in March. But this could also be a sign of a more significant slowdown. As you mentioned, we learned this week that nearly 1 out of 5 credit card holders are at or near their borrowing limit. And economist Elizabeth Renter says, even with today's positive news on inflation, some shoppers may just be hitting a wall.

RENTER: We're still feeling that sticker shock, and now it's matched with high borrowing costs. And so some consumers are getting it from both sides.

HORSLEY: Now, the Federal Reserve would probably welcome a little slowdown in consumer spending, which might help to keep a lid on inflation, but you don't want spending to drop too much and send the economy into a tailspin. So that is something to keep a wary eye on.

On the plus side, Juana, April was the 12th month in a row in which average wages grew faster than prices. So the average worker is able to buy more today. And so long as that's the case, spending probably won't drop too much.

SUMMERS: That's NPR's Scott Horsley. Thank you, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.