The Federal Reserve’s favored measure of inflation showed an uptick in prices in April, inching up 0.4% month over month, above expectations and above the 0.1% recorded in March.
The reading ratchets up pressure on the central bank to find a way to curb prices.
The government’s personal consumption expenditures price index, released Friday morning, also showed annual inflation remained persistent, with the headline rate rising 4.4% from the 4.2% rate recorded in March and in line with consensus forecasts by economists surveyed by FactSet.
The core PCE reading, which excludes food and energy prices, increased 0.4% on a month-to-month basis in comparison to 0.3% in March, the Bureau of Economic Analysis reported. Annually, core PCE is up 4.7%, hotter than economists’ expectations and an increase from the 4.6% rate recorded in March.
Annual inflation, as measured by PCE, is still more than twice as high the Fed’s target rate of 2%, despite the central bank’s intense rate hikes over the past year.
Goods prices drove higher core PCE inflation in April, with an increase of 0.8%, due in part to rising motor vehicles and parts costs. Spending on services rose by 0.3%, led by spending for financial services and insurance.
Service prices outpaced goods in the headline PCE index. Prices for services—which span a wide-range of sectors including medical care, transportation, and hospitality—climbed by 0.4% in April, reaching an annual pace of 5.5%. Goods prices also rose by 0.3% on a monthly basis and are up 2.1% from a year ago. Food prices, which increased 6.9% on an annual basis, were offset by falling energy costs.
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The Federal Reserve’s preferred measure of inflation is expected to show that prices continued to climb in April, at a 0.3% monthly pace.
The government’s personal consumption expenditures price index, to be released Friday morning, is likely to show that inflation inched up on an annual basis, as well, rising to 4.3% from the 4.2% rate recorded in March, according to consensus forecasts of economists surveyed by FactSet.
Economists predict that core PCE, which excludes the more volatile food and energy sectors, will show an increase of 0.3% from March to April, but stay steady on an annual basis at a 4.6% rate year-over-year. Core data are thought to provide a clearer picture of inflation’s trajectory.
Assuming economists’ estimates prove correct, April’s PCE measure will provide no real relief to Fed officials, who acknowledged that inflation remains persistently “too high,” according to the minutes from the Fed’s May 2-3 policy meeting, released Wednesday. Several officials noted that the central bank’s progress in bringing inflation back down to the Fed’s 2% annual target could remain “unacceptably slow.” That suggests that at least some members of the Federal Open Market Committee might push for further rate hikes during the June 13-14 meeting.
Yet there is also uncertainty among committee members about how much more policy tightening “may be appropriate” as the Fed weighs reining in inflation against recent bank instability and slower economic growth.
The Bureau of Economic Analysis revised upward the growth of first-quarter U.S. gross domestic product, noting that GDP increased at an annual rate of 1.3% in the period. That’s below what experts tend to consider the ideal GDP growth rate of between 2% and 3%, but higher than economists’ estimates of 1.1% growth.
“Growth is slowing as the drag from higher interest rates continues to accumulate,” wrote Gus Faucher, PNC’s chief economist.
The housing market, in particular, has already contracted significantly because of rising mortgage rates, while falling corporate profits are a drag on business investment, Faucher noted. Still, the labor market remains strong, which has helped support gains in consumer spending.
Although headline and core PCE are expected to remain fairly steady, the previously reported consumer price index dropped in April for the 10th month in a row, despite higher gas prices. Yet on a monthly basis, similar to PCE expectations, April’s CPI showed somewhat stronger inflation, with headline prices climbing 0.4%, up from 0.1% recorded in March. Core CPI registered a 0.4% monthly increase in April.
Fed officials tend to prefer the Bureau of Labor Statistics’ PCE inflation measure, which tracks direct and indirect purchases by all U.S. households and nonprofits, because it has proved more consistent than CPI over the longer term. The CPI sources data from urban consumers.
Additionally, the CPI puts more weight on shelter costs, including rent and the owners’ equivalent rent, which have contributed to higher inflation readings in recent months due to higher housing costs.
Economists expect Friday’s PCE report to factor significantly into the Fed’s deliberations about whether to pause or continue rate hikes. “What happens next will come down to the data and events, such as inflation, jobs, the debt ceiling showdown, and what is happening with the state of the banking sector and the impact on the flow of credit,” wrote James Knightley, ING’s chief international economist.
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An emphasis will likely be placed on the PCE’s “supercore” data, calculated by subtracting housing rents from core PCE. It grew by only 0.24% month-over-month in March.
But that supercore metric isn’t infallible, writes Clayton Allison, a portfolio manager at Prime Capital Investment Advisors. “When housing rents are taken out, the gauge is left with more volatile components like airfare and hotel prices that may have seen growth over the past month due to resilient consumer spending and a still robust labor market,” Allison noted, adding that stickier areas with increasing costs, such as healthcare services, also take on a larger weights.
Knightley is forecasting that officials will “skip” a interest-rate hike at the June FOMC meeting. Currently tighter lending conditions are thought to be doing the Fed’s work for it, and further rate rises aren’t necessary, Knightley wrote. That said, he noted that some at the Fed want to see clear evidence that inflation is destined to head back to 2%.
“The Fed has repeatedly said they will be data dependent when making their decisions, so if the data come in hot on Friday I’d expect committee members to continue their hawkish rhetoric and the odds of a pause to decline,” Allison said.
The April PCE data will be released on Friday at 8:30 a.m.
Write to Megan Leonhardt at [email protected]
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