(Adds details from CPI report in paragraphs 2-5, analyst comments in paragraphs 6 and 10, updates market reaction in paragraph 7-8)
May 15 (Reuters) -
Federal Reserve policymakers who say they need to see further progress on inflation before reducing borrowing costs got some encouraging data on Wednesday with a government report showing inflation eased a bit in April.
The 3.4% rise in the consumer price index from a year earlier, and the 0.3% increase from March, shows the Fed still has some distance to go before it achieves its 2% target for inflation.
But the report broke a three-month streak of hotter-than-expected readings that had sapped Fed policymaker confidence in a narrative of steadily easing price pressures, prompting an increasing number of them to warn that rates would need to stay high for longer.
Particularly heartening in Wednesday's report, analysts said, was a slight easing in shelter inflation that policymakers have long expected but had been disappointingly slow to show up in the data. Rent prices rose 0.35% from a month earlier, their slowest pace since 2021, the report showed.
Core CPI, which strips out energy and food prices and is seen as a better gauge of underlying price pressures, rose 3.6%, its slowest in three years. A separate report showed retail sales were weaker than expected in April.
"The weak retail sales report and cooling core CPI bolster the case for the Fed to start cutting interest rates this year," wrote Bill Adams, Chief Economist for Comerica Bank.
After the data traders firmed up bets on Fed rate cuts in both September and December, with rate-futures contracts pricing pointing to a year-end policy rate of 4.75%-5%, down from the current range of 5.25%-5.5%.
Even long-shot odds on an earlier start to policy rate reductions shortened slightly, with traders briefly pricing in a nearly one-in-three chance of a July rate cut, versus about a one-in-four chance seen at Tuesday's close.
Fed Chair Jerome Powell on Tuesday signaled the Fed may need to defer rate cuts until farther into the year to ensure inflation is headed back down to the Fed's 2% goal, but also said he thinks a rate hike at this point is unlikely.
"If there were concerns that they weren't going to cut at all, this just alleviated some of those concerns," said Jason Price, chief of investment strategy and research at Glenmede. "What it doesn't do is put the Fed on a trajectory to begin cutting immediately. They're going to need a couple more reports to get some confidence."
(Reporting by Ann Saphir, Ankika Biswas, and Howard Schneider; Editing by Andrew Heavens and Chizu Nomiyama)
