U.S. consumer prices increased by the most in 15 months in April, which could support the Federal Reserve’s contention that recent low inflation readings were transitory and allow the central bank to keep interest rates unchanged for a while.
But gains in inflation are likely to be limited as the report from the Commerce Department on Friday also showed a deceleration in consumer spending last month, the latest indication that economic growth was slowing after a temporary boost from exports, inventories and defense spending in the first quarter.
Low inflation together with slowing economic growth have led to calls, including from President Donald Trump, for the Fed to cut rates. Fed Chairman Jerome Powell has maintained the soft readings “may wind up being transient.” The Fed this month kept rates unchanged and signaled little inclination to adjust monetary policy anytime soon.
The personal consumption expenditures (PCE) price index increased 0.3% last month, the biggest gain since January 2018, after rising 0.2% in March. That lifted the annual increase in the PCE price index to 1.5% from 1.4% in March.
Excluding the volatile food and energy components, the PCE price index gained 0.2% last month after edging up 0.1% in March. In the 12 months through April, the so-called core PCE price index increased 1.6% after rising 1.5% in March.
The core PCE index is the Fed’s preferred inflation measure. It hit the U.S. central bank’s 2% inflation target in March 2018 for the first time since April 2012.
A much weaker inflation pulse than initially thought in the first quarter had led economists to anticipate that the annual core PCE price index would remain at 1.5% in April.
The dollar pared losses against a basket of currencies following the release of the data, while U.S. Treasury prices were trading higher.
CONSUMER SPENDING COOLS
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.3% as consumers cut back purchases of long-lasting manufactured goods such as motor vehicles. They also spent less on services, including household electricity and gas.
Data for March was revised up to show consumer spending jumping 1.1%, the biggest increase since August 2009, instead of the previously reported 0.9% rise. Economists polled by Reuters had forecast consumer spending would advance 0.2% in April.
When adjusted for inflation, consumer spending was unchanged in April. This so-called real consumer spending rose 0.9% in March. The weak real consumer spending in April added to soft reports on industrial production, orders for long-lasting manufactured goods and home sales in suggesting slower economic growth in the second quarter.
Consumer spending increased at a 1.3% annualized rate in the first quarter, the slowest in a year. The overall economy grew at a 3.1% rate last quarter, flattered by the volatile exports, inventory and defense components. Growth estimates for the April-June quarter are below a 2.0% rate.
Still, consumer spending remains supported by a strong labor market. The lowest unemployment rate in nearly 50 years is steadily pushing up wages. Last month, personal income rose 0.5% in April after ticking up 0.1% in March. Wages rose 0.3% in April. Savings increased to $990.3 billion in April from $963.7 billion in March.
© 2022 Thomson/Reuters. All rights reserved.