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U.S. inflation picks up, keeping Fed tilted toward another hike

May 26, 2023 Updated Fri., May 26, 2023 at 9:07 p.m.

A customer shops during the grand reopening of a Century 21 department store in New York on May 16.  (Stephanie Keith/Bloomberg)
A customer shops during the grand reopening of a Century 21 department store in New York on May 16. (Stephanie Keith/Bloomberg)
By Molly Smith Bloomberg

U.S. inflation and consumer spending accelerated last month, highlighting steady price pressures and demand that will keep Federal Reserve policymakers tilted toward raising interest rates further.

The personal consumption expenditures price index, one of the Fed’s preferred inflation gauges, rose a faster-than-expected 0.4% in April, Commerce Department figures showed Friday.

From a year ago, the measure climbed 4.4%.

Excluding food and energy, the so-called core PCE index increased 0.4% from the prior month and 4.7% from April 2022, also exceeding projections.

Economists consider this to be a better gauge of underlying inflation.

Consumer spending, adjusted for prices, increased 0.5% after no change in March.

The gain was the strongest since the start of the year and reflected pickups in goods and services.

While the pace of inflation has moderated since peaking a year ago, resilient household demand risks keeping price pressures elevated.

That’s the challenge facing Fed officials as they debate whether to pause their rate-increase campaign and assess implications of tighter policy on the banking system and economy more broadly.

Following the report, traders increased bets on a Fed rate increase in June and now see such a move as more likely than a pause.

Treasury yields jumped and U.S. stock futures pared gains after the report.

Price pressures are showing few signs of abating quickly, and a strong jobs market continues to give Americans the financial wherewithal to keep spending.

While minutes of the Fed’s May meeting, as well as recent speeches, have showed officials are split as to how they’ll vote in June, they agree that inflation is still too high and are cognizant of the risks posed by credit stress and the debt ceiling drama.

Any persistence of inflation in the service sector, in part due to strong wage growth in those industries, risks keeping price growth above the Fed’s 2% target for the foreseeable future.

A so-called supercore inflation measure closely monitored by the Fed – the cost of services excluding housing and energy – increased 0.4% in April, the biggest month-over-month advance since the start of the year, according to Bloomberg calculations.

Fed Chair Jerome Powell has emphasized the importance of looking at such a figure to gauge the outlook for inflation. On a year-over-year basis, the metric rose 4.6%.

On the spending side, the report suggests the economy got off to a solid start in the second quarter. Personal consumption, unadjusted for prices, jumped 0.8%.

On an inflation-adjusted basis, outlays for goods rose 0.8%, the most since January and reflecting stronger auto purchases and pharmaceuticals.

Services increased 0.3%, also the biggest gain in three months and led by financial services and insurance as well as health care.

While unemployment remains historically low, inflation-adjusted disposable income, the main support to consumer spending, was unchanged after 0.2% increases in the prior two months. The April figure was the weakest since mid-2022.

Wages and salaries, unadjusted for prices, increased 0.5%. Nominal incomes rose 0.4%, an acceleration from the prior month. The saving rate fell to 4.1%.

Separate data Friday showed nondefense capital goods orders – a proxy of demand for business equipment – jumped 1.4%, the biggest advance since December 2021. Total bookings for durable goods rose 1.1%.In another sign of robust domestic demand, the U.S. merchandise-trade deficit widened 17% in April to $96.8 billion, the widest gap since October and above all estimates.

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