Inflation rises marginally in April, while consumer spending slows
US inflation fell in April, raising concerns for the Federal Reserve that the high rate of price increases may last longer than expected and leave the central bank unsure when to lower interest rates.
Sluggish consumer spending from the Commerce Department on Friday may help the Fed fight inflation or cause concern if the economy cools too soon.
“The Fed finds it harder to justify rate cuts as market inflation stays near 3%.” Nothing in these numbers supports the Fed’s rate-cutting idea “FXStreet senior analyst Josepth Trevisani said.
On Friday, the Commerce Department’s Bureau of Economic Analysis reported that the personal consumption expenditures (PCE) price index rose 0.3% last month, matching the unrevised gain in March.
In the year to April, the PCE price index rose 2.7%, rising similarly in March. A Reuters poll of economists predicted a 0.3% monthly increase and 2.7% annual increase. The Fed uses the PCE price index to meet its 2% inflation target. To return inflation to target, monthly inflation must be 0.2%.
U.S. Treasury securities yields dipped following the data, while equity index futures surged, implying that markets would open higher after two days of losses on Wall Street. The dollar was generally weaker.
Strong US Labor Market Foundation Bolsters First Quarter Economy
Traders of Fed policy rate futures maintained almost even odds that the central bank would begin to lower rates in September.
Following more encouraging readings in the fourth quarter of last year, the Fed has maintained its benchmark policy rate in the 5.25%–5.50% range for the previous ten months despite numerous stronger-than-anticipated inflation and labor market data from January to March.
Earlier this month, however, estimates for monthly April job increases brought some comfort, with job growth reaching its lowest level in six months. Other data confirms that consumers appear to be reducing their expenditures.
After subtracting the volatile food and energy components, the PCE price index gained 0.2% in April after climbing 0.3% in March. Core inflation rose 2.8% year on year in April, mirroring March’s gain. PCE services inflation, excluding energy and housing, increased 0.3% after rising 0.4% in March.
Since March 2022, the Fed has raised borrowing costs by 525 basis points in an effort to decrease overall economic demand. Financial markets previously projected the first rate decrease to occur in March, which was subsequently moved back to June and now September.
Consumer expenditure, which contributes to more than two-thirds of total US economic activity, rose by 0.2%, down from a downwardly revised 0.7% growth in March. Consumer spending moderated to a 2.0% pace in the first quarter, down from a robust 3.3% pace in the October–December period, according to revised GDP data released Thursday.
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