Inflation remained stubbornly high in April, which could boost the chances of interest rates staying higher for longer, according to a gauge released on Friday that the Federal Reserve follows closely.
The personal consumption expenditures price index, which measures a variety of goods and services and adjusts to changes in consumer behavior, rose 0.4% for the month excluding food and energy costs, above the 0.3% Dow estimate.
The Commerce Department reported that the gauge rose year-on-year by 4.7%, up 0.1 percentage point from expected.
Including food and energy, mainline personal consumption expenditures also rose 0.4% and rose 4.4% from a year earlier, up from the 4.2% rate in March.
Although inflation has risen, consumer spending has held up and so has personal income.
The report showed that spending jumped 0.8% in the month, while personal income accelerated 0.4%. Both numbers are expected to rise by 0.4%.
Price increases were distributed almost evenly, with goods up 0.3% and services up 0.4%. Food prices decreased by less than 0.1%, while energy prices increased by 0.7%. On a yearly basis, prices for goods rose 2.1% and services 5.5%, which is another indication that the US is leaning back towards a service-focused economy.
Food prices rose 6.9% from a year ago, while energy prices fell 6.3%. The gain in personal consumption expenditures was the largest since January.
Markets didn’t react much to the news, with stock market futures pointing higher as investors focused on improving prospects for a debt ceiling deal in Washington. Treasury yields have been mostly higher.
“With a hotter-than-expected PCE report today, the Fed’s summer vacation may need to be cut short as consumer holidays increase spending,” noted Georges Mathieu, chief investment officer at Key Private Bank. “Prior to today’s release, we believe the Fed may have been hoping for a summer break (i.e. pause and reassessment), but now, it appears the Fed’s inflation-lowering mission is far from over.”
The report comes a few weeks before the Federal Reserve’s June 13-14 policy meeting.
The Fed is targeting annual inflation around 2%, which means current levels remain well above the target and leads to the possibility that the aggressive moves the central bank has made over the past year or so will remain intact.
One of the ways that a rate hike by the Fed is supposed to work is by reducing demand. However, April spending figures show that consumers continued to spend in the face of both rising rates and strong inflation, meaning policymakers may have to do more.
Immediately after the report was released, market rates swung to a 57% chance that the Fed would raise interest rates another quarter percentage point at the June meeting. There are only two major data points ahead of this, with the May Nonfarm Payrolls report due next Friday and the Consumer Price Index on June 13th.
Along with a slight pickup in consumer spending, demand for durable goods also unexpectedly rose 1.1% in April, according to a separate Commerce Department report. Economists polled by Dow Jones were looking for a decline of 0.8%. Excluding transportation, which rose 3.7%, new orders fell 0.2%.
Consumers have had to dip into savings to continue their spending, with the personal savings rate of 4.1% representing a decrease of 0.4 percentage points from March.
The data comes amid a high level of uncertainty about the direction of the economy from here. Expectations of a recession later this year are high, given rising interest rates, an expected credit crunch in the banking industry and consumer pressure on a variety of fronts.
However, Thursday’s report showed that the economy grew more in the first quarter than initially reported, with gross domestic product rising at an annual pace of 1.3% compared to a previous estimate of 1.1%.
Minutes of the Federal Reserve’s meeting released on Wednesday showed policymakers divided on their next move, as members sought to balance higher-than-expected inflation with spillovers from turmoil in the banking industry.
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