A key U.S. price index edged higher in April as consumer spending rebounded, suggesting inflationary pressures in the economy remained high.
The index, known as the Personal Consumption Expenditures Price Index and closely watched by the Federal Reserve, showed prices rose 0.4% between March and April. That was well above last month’s 0.1% gain. On a year-over-year basis, prices rose 4.4% in April, up from 4.2% in March. The year-over-year figure was down sharply from a peak of 7% last June, but still well above the Fed’s 2% target.
A government report on Friday showed consumers remained active despite higher prices. Their spending rose 0.8% from March to April, the biggest increase since January. Much of the increase was driven by spending on new vehicles, which surged 6.2%. Among other items, Americans bought more computers, gasoline and clothes.
Despite long-term forecasts of a looming recession, Friday’s data underscored the U.S. economy’s astonishing resilience. Staple consumer spending, which drives the U.S. economy, has been boosted by solid job growth and wage gains. The economy grew at a subdued 1.3% annual rate from January to March and is expected to accelerate to 2% in the current April-June quarter.
At the same time, the persistence of high inflation complicates the Fed’s interest rate decisions. After raising rates 10 times in a row over the past 14 months, Fed Chairman Jerome Powell said the central bank may forego raising rates at its mid-June meeting. But an outspoken group on the Fed’s 18-member rate-setting committee has pushed for further rate hikes later this year, citing inflation not slowing fast enough.
“Inflation is too sticky for the Fed to commit to an extended pause,” said Michael Gapen, U.S. economist at Bank of America Securities. “Even if the Fed skips June, it will let July continue to raise rates.”
Fed officials pay particular attention to a category of prices known as core inflation, which excludes volatile energy and food costs and is considered a better gauge of underlying inflation. Core prices rose 0.4% from March to April, unchanged from the previous month and up 4.7% from 12 months earlier. The year-over-year core inflation reading was little changed since hitting 4.6% for the first time in December.
Another report on Friday showed another sign that the economy remains solid. It showed that a measure of business investment in durable industrial goods jumped 1.4% in April – suggesting businesses continued to spend as consumer demand remained solid despite rising inflation and borrowing costs.
The PCE price index is independent of the government’s better known consumer price index. The government reported earlier this month that the CPI rose 4.9% in April from 12 months earlier.
The PCE index has tended to show inflation below the CPI since inflation started to spike after the pandemic recession. This is partly because rents, one of the biggest drivers of inflation, are twice as heavily weighted in the CPI as they are in the PCE. Additionally, the PCE index attempts to account for changes in how people shop when inflation occurs. As such, it can capture emerging trends — for example, when consumers switch from expensive national brands to cheaper store brands.
The latest inflation data comes as Fed officials loudly debate their next move after raising key interest rates 10 times in the past 14 months. Several policymakers said they were in favor of raising rates even higher in the coming months. But most Fed watchers expect the central bank to forego another rate hike at its next meeting in mid-June.
Powell said last week that after raising the benchmark interest rate to a 16-year high of about 5.1 percent, Fed officials have the ability to wait and see the impact of those rate hikes on the economy. It could take a year or more for rate hikes to significantly slow the job market and the overall economy.
The Fed’s ultimate goal is to raise borrowing costs for consumers and businesses, thereby reducing spending, growth and inflation. Its hikes have more than doubled mortgage rates and raised the cost of auto loans, credit card borrowing and business loans. They also increase the risk of a recession, which most economists predict will begin sometime this year.
Even some officials who may be in favor of no rate hike in June, such as Philip Jefferson, an influential member of the Fed’s board of governors, said they were disappointed by how little inflation had slowed. The latest inflationary pressures largely reflect continued increases in prices for services, including restaurant meals, hotel rooms and auto repair.
Inflation is a big reason millions of Americans are pessimistic about the economic outlook, even as the unemployment rate is at a half-century low of 3.4% and many workers are enjoying decent wage gains.
Yet a Fed report this week found that, on average, inflation outpaced wage growth, making life worse for many. At the end of last year, just under three-quarters of Americans said they were “doing well” or comfortably financially. That was down 5 percentage points from the previous year and one of the lowest levels measured since the survey began in 2016.