The personal consumption expenditures price index – a measure of inflation closely watched by the Federal Reserve – rose 0.4% in April on a monthly basis and 4.4% on an annual basis, the Bureau of Economic Analysis announced Friday. The higher-than-expected results disappointed analysts who hoped to see a decrease or at least steadiness in the measure; instead, both readings increased from the month before.
The core PCE index, which removes volatile food and fuel prices, showed an even stronger gain on an annual basis, rising 4.7%, though the monthly reading was the same as non-core.
The same report shows that consumer spending continues to be a source of strength for the economy, rising 0.8% in April on a monthly basis – a big jump from the 0.1% increases recorded in February and March. In inflation-adjusted terms, consumer spending rose 0.5% last month. That strength, though, could be seen as a problem by Fed officials looking for signs of cooling.
Eyeing the Fed: The report probably boosted the odds that the Federal Reserve could raise interest rates again, if not at the Fed meeting next week then later this year. Many analysts were betting that the interest rate increase cycle was done.
“When I look at the data and I look at what’s happening with inflation numbers, I do think we’re going to have to tighten a bit more,” Cleveland Fed President Loretta Mester told CNBC. “Everything is on the table in June.”
Diane Swonk, chief economist at KPMG, said the numbers are moving in “the wrong direction for the Fed, adding that “a July hike is now in play.” Swonk noted that Fed officials who want to halt the interest rate hikes will have a tougher time making their argument. “Doves entering June FOMC meeting with singed wings,” she tweeted.
Economist Michael Gapen of Bank of America Securities told the Associated Press that even “if the Fed skips June, it will keep July in play” for a rate hike. “Inflation is too sticky for the Fed to commit to an extended pause,” he said.
George Mateyo, chief investment officer at Key Private Bank, said the latest data suggests the Fed may move sooner rather than later to raise interest rates again. “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,” he said.
