In April, inflation in the United States remained stubbornly high, potentially indicating that interest rates could remain elevated for an extended period. The personal consumption expenditures (PCE) price index, a key measure closely monitored by the Federal Reserve, rose by 0.4% for the month, surpassing the estimated 0.3% increase. On an annual basis, the PCE index registered a 4.7% rise, exceeding expectations by 0.1 percentage point, according to the Commerce Department.
When excluding food and energy costs, the core PCE index also recorded a 0.4% increase in April. The headline PCE, which includes food and energy, rose by 0.4% as well and was up 4.4% from the previous year, surpassing the 4.2% rate observed in March.
Despite the higher inflation rate, consumer spending demonstrated resilience as personal income experienced growth. Spending surged by 0.8% for the month, surpassing the anticipated 0.4% increase, while personal income accelerated by 0.4%.
The price increases were fairly evenly distributed, with goods rising by 0.3% and services increasing by 0.4%. Food prices experienced a slight decline of less than 0.1%, while energy prices rose by 0.7%. On an annual basis, goods prices rose by 2.1% and services saw a 5.5% increase, suggesting a shift towards a services-focused economy in the United States.
Food prices rose by 6.9% compared to a year ago, while energy prices fell by 6.3%. Both monthly PCE gains were the highest observed since January.
Following the release of the report, market expectations shifted, with futures indicating a higher stock market as investors focused on the prospects of a debt ceiling deal in Washington. Treasury yields were predominantly higher.
The latest PCE report has implications for the Federal Reserve’s policy meeting scheduled for June 13-14. The Fed aims for an annual inflation target of around 2%, indicating that the current levels are well above the desired goal. This suggests that the aggressive measures implemented by the central bank over the past year may remain in place.
One of the intended effects of the Fed’s rate hikes is to reduce demand. However, the April spending figures indicate that consumers have continued spending despite higher interest rates and significant inflation, potentially requiring policymakers to take further action.
Immediately after the report, market pricing indicated a 56% chance of the Fed enacting another quarter percentage point interest rate hike at the June meeting, as per the CME Group. Before the meeting, there are two key inflation-related data points: the May nonfarm payrolls report, due next Friday, and the consumer price index, set to be released on June 13.
In addition to the rise in consumer spending, demand for durable goods unexpectedly increased by 1.1% in April, according to a separate report by the Commerce Department. Economists had anticipated a decline of 0.8%. Excluding transportation, new orders fell by 0.2%.
Consumers had to dip into their savings to sustain their spending, resulting in a 0.4 percentage point drop in the personal savings rate to 4.1% from March.
These figures emerge during a time of heightened uncertainty regarding the future trajectory of the economy. With rising interest rates, potential credit crunch in the banking industry, and consumer pressure from various fronts, expectations of a recession later this year remain high.
Despite mixed economic indicators, some economists at Citigroup anticipate that the Fed will revise its forecasts for inflation and GDP upward during the June meeting.
The recently released minutes from the May Fed meeting revealed a division among policymakers regarding the next course of action. The members sought to balance higher-than-expected inflation with the spillover effects from banking industry troubles.