MondayFounder

April’s inflation figures revealed a persistent high that could have far-reaching implications for interest rates, as indicated by a closely followed gauge released by the Federal Reserve on Friday.

The personal consumption expenditures price index, which factors in changes in consumer behavior and covers a wide range of goods and services, recorded a 0.4% increase for the month, excluding food and energy costs. This surpassed the Dow Jones estimate of 0.3%.

On an annual basis, the gauge climbed 4.7%, surpassing expectations by 0.1 percentage point, according to the Commerce Department’s report.

Including food and energy, the headline PCE also rose by 0.4% and was up 4.4% from the previous year, surpassing March’s 4.2% rate.

Despite the higher inflation rate, consumer spending remained resilient as personal income witnessed growth. The report revealed a notable 0.8% surge in spending for the month, with personal income accelerating by 0.4%. Both figures surpassed the expected 0.4% increase.

The price increases were evenly distributed, with goods rising by 0.3% and services experiencing a 0.4% uptick. Food prices saw a minor decline of less than 0.1%, while energy prices rose by 0.7%. On an annual basis, goods prices increased by 2.1%, whereas services recorded a 5.5% rise, further indicating a shift towards a services-focused economy in the United States.

Compared to the previous year, food prices rose by 6.9%, while energy prices fell by 6.3%. These monthly PCE gains were the highest since January.

Market response to the news was relatively muted, with stock market futures pointing upwards as investors focused on the prospects of a debt ceiling deal in Washington. Treasury yields showed mostly positive movement.

Implications for the Federal Reserve
George Mateyo, Chief Investment Officer at Key Private Bank, noted, “With today’s hotter-than-expected PCE report, the Fed’s summer vacation may need to be cut short as consumers’ vacations fuel spending. Prior to today’s release, we believe that the Fed may have been hoping to take the summer off (i.e., pause and reassess), but now, it seems as if the Fed’s job of getting inflation down is not over.”

This report comes just a few weeks before the Federal Reserve’s policy meeting scheduled for June 13-14.

The Fed aims to maintain an annual inflation rate around 2%, which means that the current levels remain significantly above the target. This suggests that the aggressive measures taken by the central bank over the past year are likely to remain in place.

One of the ways the Fed’s rate hikes are intended to work is by reducing demand. However, the April spending numbers demonstrate that consumers have continued to spend despite higher rates and persistent inflation. This indicates that policymakers may have more work to do.

Following the report, market pricing shifted to a 56% chance of the Fed enacting another quarter percentage point interest rate hike at the June meeting, according to the CME Group. Only two key inflation-related data points are expected before then, with the May nonfarm payrolls report due next Friday and the consumer price index set to be released on June 13.

In addition to the rise in consumer spending, demand for durable goods also unexpectedly increased by 1.1% in April, according to a separate report from the Commerce Department. Economists surveyed by Dow Jones had anticipated a decline of 0.8%. Excluding transportation, new orders fell by 0.2%.

To sustain their spending, consumers had to dip into their savings, leading to a 0.4 percentage point drop in the personal savings rate.