The inflation measure closely watched by the US Fed rose in April | Economy and Business News

A key US price index rose in April and consumer spending rebounded, a sign that inflationary pressures in the economy remain high.

The index, which is called the Personal Consumption Expenditures Price Index and is closely monitored by the Federal Reserve, showed prices rose 0.4 percent from March to April. That was much higher than the previous month’s 0.1 percent increase. Measured year-over-year, prices rose 4.4 percent in April, up from 4.2 percent in March. The year-on-year number is down sharply from a high of 7 percent last June, but is still well above the Fed’s 2 percent target.

The government report on Friday showed that despite rising prices, consumers remain optimistic. Its spending increased 0.8 percent from March to April, the biggest increase since January. Much of the increase was due to spending on new cars, which soared 6.2 percent. Among other items, Americans also bought more computers, gasoline, and clothing.

Despite longstanding predictions of a coming recession, Friday’s data underscores the surprising resilience of the US economy. Consumer spending, which drives most of the US economy, has been boosted by strong job gains and wage increases. The economy, which grew at a sluggish 1.3 percent annual rate from January to March, is expected to accelerate to a 2 percent pace in the current April-June quarter.

At the same time, persistently high inflation is complicating the Federal Reserve’s interest rate decisions. Chairman Jerome Powell has signaled that the Fed is likely to forego raising rates when it meets in mid-June, after 10 consecutive hikes in the last 14 months. But a vocal group among the 18-member Fed’s rate-setting committee has pushed for more rate hikes later this year on the grounds that inflation isn’t slowing fast enough.

“Inflation is too tough for the Fed to commit to a prolonged pause,” said Michael Gapen, US economist at Bank of America Securities. “Even if the Fed skips June, it will keep July in play” for a rate hike.

Fed officials particularly look at a price category called core inflation, which excludes volatile energy and food costs and is considered a better indicator of core inflation. Core prices rose 0.4 percent from March to April, the same as the previous month, and 4.7 percent from 12 months earlier. The year-over-year core inflation figure is little changed since it first touched 4.6 percent in December.

Another sign that the economy remains strong appeared in a separate report on Friday. It showed that a measure of business investment in durable factory goods rose 1.4 percent in April, evidence that businesses have kept spending despite higher inflation and borrowing costs given demand for goods. consumers still stable.

The Personal Consumption Expenditures Price Index is separate from the more well-known government Consumer Price Index. The government reported earlier this month that the CPI rose 4.9 percent in April from 12 months earlier.

Since inflation began to rise after the pandemic recession, the PCE index has tended to show lower inflation than the CPI. In part, that was because rents, which were among the main drivers of inflation, have twice as much weight in the CPI as in the PCE. Additionally, the PCE index seeks to account for changes in the way people shop when inflation rises. As a result, you can capture emerging trends, when, for example, consumers shift away from expensive national brands in favor of cheaper store brands.

Interest rates

The latest inflation figures came as Fed officials are noisily debating their next steps after raising their key interest rate 10 times in the past 14 months. Several of the policymakers have said they favor raising rates further in the coming months. But most Fed watchers expect the central bank to forego another hike at its next meeting in mid-June.

Powell said last week that after raising his benchmark rate to a 16-year high of around 5.1 percent, Fed officials can afford to wait and see how those increases have affected the economy. It can take a year or more for rate increases to significantly slow down the job market and the broader economy.

The Fed’s ultimate goal is to make borrowing more expensive for consumers and businesses, thereby reducing spending, growth, and inflation. His rate hikes have more than doubled mortgage rates and raised the costs of auto loans, credit card loans and business loans. They have also increased the risk of a recession, which most economists predict will start sometime this year.

Even some officials who are likely to favor skipping a June rate hike, such as Philip Jefferson, a member of the Fed’s influential Board of Governors, have said they are disappointed that inflation hasn’t slowed more than expected. has done. Much of the latest inflationary pressure reflected persistently higher prices for services, including restaurant meals, hotel rooms and car maintenance.

Inflation has been one of the main reasons millions of Americans have expressed a bleak outlook on the economy, despite the fact that the unemployment rate stands at 3.4 percent, the lowest in half a century, and many workers have received solid wage gains.

However, a Federal Reserve report this week found that, on average, inflation has outpaced those wage increases and left 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 marked a 5 percentage point drop from the previous year and was among the lowest levels measured since the survey began in 2016.