Inflation measure closely tracked by US Fed rose in April
A major index of prices in the United States rose in April and consumer spending recovered, a sign that inflationary pressures in the economy remain high.
The index, which is called the Personal Consumption Expenditure Price Index and is closely monitored by the Federal Reserve, showed that prices rose 0.4 percent from March to April. That was much higher than the 0.1 percent increase last month. Measured on an annual basis, prices rose by 4.4 percent in April, compared to 4.2 percent in March. The year-over-year figure is down sharply from a peak of 7 percent last June, but remains well above the Fed’s 2 percent target.
Friday’s government report showed that consumers remain optimistic despite rising prices. Their spending rose 0.8 percent from March to April, the biggest increase since January. Much of the increase was driven by spending on new cars, which rose by 6.2 percent. Americans bought more computers, gasoline and clothing, among other things.
Despite long-standing predictions of an impending recession, Friday’s data underscores the surprising resilience of the US economy. Consumer spending, which powers most of the US economy, has been supported by solid job growth and wage increases. The economy, which grew at a sluggish annualized rate of 1.3 percent from January through March, is expected to accelerate to 2 percent in the current April-June quarter.
At the same time, persistently high inflation complicates interest rate decisions by the Federal Reserve. Chairman Jerome Powell has indicated that the Fed will likely refrain from a rate hike when it meets in mid-June, after 10 consecutive hikes over the past 14 months. But a vocal group under the Fed’s 18-member interest rate committee has been pushing for more rate hikes later this year because inflation isn’t slowing fast enough.
“Inflation is too sticky for the Fed to take an extended pause,” said Michael Gapen, U.S. economist at Bank of America Securities. “Even if the Fed skips June, it keeps July in play” for a rate hike.
Fed officials are paying particular attention to a price category called core inflation, which excludes volatile energy and food costs and is considered a better gauge of underlying inflation. Core prices rose 0.4 percent from March to April, the same as in the previous month, and 4.7 percent from 12 months earlier. The annual core inflation rate has changed little since it first reached 4.6 percent in December.
Another sign that the economy remains solid came in a separate report on Friday. It showed that a measure of companies’ investment in manufactured goods rose 1.4 percent in April – evidence that companies have continued to spend despite higher inflation and borrowing costs given still-stable consumer demand.
The consumer spending price index is separate from the government’s better-known consumer price index. The government reported earlier this month that CPI rose 4.9 percent in April from 12 months earlier.
Since inflation started to pick up after the pandemic recession, the PCE index has tended to show lower inflation than the CPI. This was partly because rents, which were among the biggest drivers of inflation, weigh twice as much in the CPI as in the PCE. In addition, the PCE index tries to account for changes in how people shop when inflation jumps. As a result, it can catch emerging trends – for example, when consumers move from high-priced national brands to cheaper retail brands.
The latest inflation numbers came in as Fed officials vociferously debated their next steps after raising their key interest rate 10 times over the past 14 months. Several policymakers have said they favor an even higher rate hike in the coming months. But most Fed watchers expect the central bank to refrain from another rate hike at its next meeting in mid-June.
Powell said last week that Fed officials can afford to wait and see how those hikes affected the economy after raising benchmark interest rates to a 16-year high of about 5.1 percent. It could take a year or more for interest rate hikes to significantly slow down the labor market and the overall economy.
The ultimate goal of the Fed is to make borrowing more expensive for consumers and businesses, thereby reducing spending, growth and inflation. The rate increases have more than doubled mortgage rates and increased the cost of car loans, credit card loans and business loans. They have also increased the risk of a recession, which most economists believe will start sometime this year.
Even some officials likely preferring to skip a rate hike in June, such as Philip Jefferson, a member of the Fed’s influential board of directors, have said they are disappointed that inflation hasn’t slowed more than it does now. is. Much of the latest inflationary pressures reflected continued higher prices for services, including restaurant meals, hotel rooms and car maintenance.
Inflation has been a major reason why millions of Americans have expressed gloomy outlooks on the economy, even though the unemployment rate is at 3.4 percent its lowest point in half a century and many workers have received solid pay raises.
Still, a report from the Federal Reserve this week found that inflation is on average higher than those wage increases, leaving many people worse off. At the end of last year, just under three-quarters of Americans said they were “doing well” financially or living comfortably. That represented a drop of 5 percentage points from the previous year and was among the lowest levels recorded since the survey began in 2016.