Inflation remained stubbornly high in April, potentially bolstering the odds that interest rates will stay higher for longer, according to an indicator released Friday that the Federal Reserve is watching closely.
The personal consumption expenditure price index, which measures a variety of goods and services and adjusts for changes in consumer behavior, rose 0.4% for the month excluding food and energy costs, above l 0.3% Dow Jones estimate.
On an annual basis, the gauge rose by 4.7%, or 0.1 percentage point more than expected, the Commerce Department reported.
Including food and energy, overall PCE also rose 0.4% and rose 4.4% from a year ago, higher than the 4.2% rate in March.
Despite the higher inflation rate, consumer spending held up well while personal income rose.
The report showed spending jumped 0.8% for the month, while personal income accelerated 0.4%. Both figures were expected to increase by 0.4%.
Price increases were almost evenly distributed, with goods rising 0.3% and services 0.4%. Food prices fell less than 0.1% while energy prices rose 0.7%. On an annual basis, prices for goods increased by 2.1% and services by 5.5%, another indication that the United States was returning to a service-oriented economy.
Food prices rose 6.9% from a year ago, while energy fell 6.3%. PCE’s two monthly gains were the highest since January.
The markets reacted little to the news, with stock market futures point up as investors focused on improving prospects for a debt ceiling agreement in Washington. Treasury yields were mostly higher.
Fed implications
“With today’s warmer-than-expected PCE report, the Fed’s summer vacation may need to be cut short as consumer vacations fuel spending,” noted George Mateyo, chief investment officer at Key Private Bank. “Prior to today’s release, we believe the Fed may have been hoping to take its summer (i.e. pause and reassess), but now it appears the Fed’s job to do lowering inflation is not over.”
The report comes a few weeks before the Fed’s June 13-14 policy meeting.
The Fed is targeting annual inflation of around 2%, which means that current levels remain well above target and the aggressive actions taken by the central bank over the past year could remain intact.
One of the ways Fed rate hikes are supposed to work is to depress demand. However, April’s spending figures show consumers continued to spend in the face of both higher rates and high inflation, meaning policymakers may have more to do.
Immediately after the report, market prices rose to a 56% chance the Fed would enact another quarter-percentage-point hike in interest rates at the June meeting, according to the CME group. There are only two key data points tied to inflation until then, with the May nonfarm payrolls report due next Friday and the consumer price index on June 13.
Along with rising 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 expected a drop of 0.8%. Excluding transportation, which rose 3.7%, new orders fell 0.2%.
Consumers had to dip into savings to maintain spending, with the personal savings rate of 4.1% down 0.4 percentage points from March.
The data comes amid a high level of uncertainty about where the economy is headed from here. Expectations of a recession later this year are high, given rising interest rates, an expected credit crunch in the banking sector and consumer pressure on various fronts.
However, a report on Thursday showed the economy grew more in the first quarter than initially reported, with real GDP growing at an annualized rate of 1.3% from the previous estimate of 1.1%.
However, real gross domestic income fell 2.3% in the quarter. The GDI measures all the money earned for goods and services and generally changes together with GDP. The average of the two measures shows a decline in quarterly growth of 0.5%, according to the Commerce Department.
Meanwhile, the merchandise trade deficit jumped 17% in April to $96.8 billion, according to the Commerce Leading Economic Indicators report released on Friday. Exports are negative for GDP.
Still, Citigroup economists expect the Fed to raise its inflation and GDP forecasts when it releases its updates at the June meeting.
Minutes published on Wednesday from the Fed’s May meeting showed policymakers were divided on their next move, as members sought to balance higher-than-expected inflation against the contagion effects of banking sector turmoil.