Key inflation gauge eases for the first time since 2020

An inflation indicator followed by the Federal Reserve rose 6.3% in April from the previous year, just below the four-decade high set in March and the first slowdown since November 2020.

Called the personal consumption expenditure price index, the measure of inflation differs in some way from the consumer price index, which helps to explain why it shows a lower level of inflation than the CPI. For example, rents have less weight in the PCE than in the CPI.

The Commerce Department’s Friday report adds to other recent signs that while high inflation continues to cause hardship for millions of households, it can finally be moderated, at least for now. In May, the CPI rose 8.3% from a year ago, down 8.5% in March; first slowdown in inflation in nine months.

The report also showed that consumer spending rose a healthy 0.9% from March to April, surpassing the month-on-month inflation rate for the fourth consecutive time. The constant willingness of consumers in the country to continue to spend freely despite inflated prices is helping to sustain the economy. However, all of this spending helps keep prices high and could make the Fed’s goal of controlling inflation even more difficult.

“The rise in inflation-adjusted spending in April shows that consumers are resilient, for the time being,” Rubeela Farooqi, chief economist at U.S. High Frequency Economics, said in a report. “With inflation still uncomfortable, the labor market strong and household spending maintaining a positive momentum, the Fed will continue with its plan to raise rates by 50 basis points in the next two meetings.”

In month-on-month terms, prices rose 0.2% from March to April, below the 0.9% increase from February to March.

However, inflation remains painfully high and is inflicting a heavy burden, especially on lower-income households. Growing demand for furniture, appliances and other goods, combined with the thicknesses of the supply chain, began to drive up prices about a year ago.

Consumer spending on entertainment and travel

Consumers are now increasingly shifting their spending from goods to services such as airfare and entertainment tickets. This trend could help cool inflation in the coming months, although it is unclear how much. The cost of services such as restaurant meals, plane tickets and hotel rooms is also rising.

President Jerome Powell has pledged to keep raising the Fed’s key short-term interest rate until inflation “falls in a clear and convincing manner.” These rate hikes have sparked fears that the Fed, in its drive to curb debt and spending, could push the economy into recession. This concern has led to sharp falls in stock prices over the past two months, although markets have recovered this week.

Powell said the Fed is aiming for a “soft or soft” landing in which wages, consumer spending and growth will slow, but the economy will avoid a recession. Most economists say that while this result is plausible, they doubt it can be achieved.

Still, Moody’s Sweet believes the Fed will stick to its plan for additional rate hikes throughout the year.

“The Fed could face a situation where higher consumer prices are starting to weigh on consumer spending, slowing GDP growth,” Sweet said. “The pandemic has not repealed the demand law, which states that a higher price of a good or service reduces the amount demanded. Therefore, new data on the PCE deflator will not deter the Fed from aggressively raising interest rates in both June and July. “

A better-known inflation indicator, the consumer price index, also reported earlier this month in slowdown in inflation still high. The CPI rose 8.3% in April from the previous year, below the March 40 high of 8.5%.

However, rising prices gas and foodworsened by Russia invasion of Ukraine, will keep inflation measures painfully high at least until the summer. The national average price of a gallon of gasoline has reached $ 4.60, according to AAA. A year ago, it was $ 3.04.

Other trends, however, suggest that core inflation may continue to slow in the coming months. Retailers have reported an increase in inventories of TVs, patio furniture and other household items, as consumers have shifted their spending more to travel-related goods and services, such as luggage and restaurant gift cards.

These stores are likely to offer discounts to clear inventory in the coming months. And carmakers have increased production as some supply chains become entangled and have managed to hire more workers. Both trends could help lower commodity prices.

“The slowdown in monthly inflation also means that with nominal revenue rising 0.4%, revenue is rising again in real terms, ending the streak of nearly a year of consecutive monthly declines. That should help. households to recover savings for the rest of this period. year, “said Michael Pearce, senior economist at Capital Economics, in a research note.

At the same time, a higher wage for many workers, especially in restaurants, hotels and warehouses, will continue to force the prices of services, which in turn would at least partially offset the benefit of less expensive products.

And most economists predict that inflation, as measured by the Fed’s preferred indicator, will still be around 4% or higher by the end of this year. Price hikes at this level would likely mean that the Fed will further raise interest rates to reduce inflation to its 2% target.

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• Jerome Powell
• Economy
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• Inflation