US Inflation Picks Up, Pushing Fed Towards Another Rate Hike

Consumer spending and inflation in the US picked up momentum last month, underscoring ongoing price pressures and robust demand that will likely keep Federal Reserve policymakers inclined towards further interest rate hikes. 

According to the Commerce Department figures released on Friday, the personal consumption expenditures (PCE) price index, a key inflation indicator for the Fed, rose by a higher-than-expected 0.4 per cent in April. Compared to the same period last year, the index climbed by 4.4 per cent. 

The core PCE index, which excludes food and energy prices and is considered a more reliable measure of underlying inflation, also exceeded projections. It increased by 0.4 per cent from the previous month and by 4.7 per cent from April 2022. 

Consumer spending, adjusted for inflation, saw a 0.5 per cent increase following no change in March. This gain, the strongest since the beginning of the year, was driven by increased purchases of both goods and services. 

Although the pace of inflation has moderated since its peak a year ago, resilient household demand poses a risk of sustained price pressures. This poses a challenge for Fed officials as they weigh whether to pause their campaign of interest rate hikes and assess the broader implications of tighter monetary policy on the banking system and the overall economy. 

Following the release of the report, traders raised their bets on a June rate hike by the Fed, seeing it as more likely than a pause. As a result, treasury yields rose, while US stock futures trimmed their gains. 

Price pressures show little sign of subsiding rapidly, and a strong job market continues to provide Americans with the means to sustain their spending habits. 

While the minutes of the Fed's May meeting and recent speeches indicate a division among officials regarding their voting intentions in June, they generally agree that inflation remains too high and acknowledge the risks posed by credit stress and the debt ceiling situation. 

Persistent inflation in the service sector, partly driven by strong wage growth in those industries, raises the possibility of price growth remaining above the Fed's two per cent target in the foreseeable future. 

The Fed closely monitors a measure known as "supercore inflation," which excludes housing and energy costs. According to Bloomberg calculations, this measure increased by 0.4 per cent in April, marking the largest month-over-month advance since the beginning of the year. On a year-on-year basis, the metric rose by 4.6 per cent. 

Fed Chair Jerome Powell has emphasised the significance of this figure in assessing the inflation outlook. 

Spending Analysis 

The latest report indicates a strong start to the second quarter in terms of spending. Personal consumption, without considering price adjustments, increased by a substantial 0.8 per cent. 

When adjusting for inflation, expenditures on goods saw a significant rise of 0.8 per cent, marking the largest increase since January. This was driven by stronger purchases of automobiles and pharmaceuticals. Services also experienced growth, with a 0.3 per cent increase, the highest in three months. Financial services, insurance, and healthcare were the primary contributors to this expansion. 

Despite historically low unemployment rates, inflation-adjusted disposable income, which plays a crucial role in supporting consumer spending, remained unchanged. This follows 0.2 per cent increases in the previous two months, making the April figure the weakest since mid-2022. 

Wages and salaries, not adjusted for prices, saw a 0.5 per cent increase, while nominal incomes rose by 0.4 per cent, indicating an acceleration compared to the previous month. The saving rate declined to 4.1 per cent. 

Additional data released on Friday revealed a 1.4 per cent surge in orders for nondefense capital goods, serving as a proxy for business equipment demand. This represents the largest increase since December 2021. Moreover, total bookings for durable goods experienced a 1.1 per cent rise. 

In another indication of strong domestic demand, the merchandise-trade deficit of the United States widened by 17 per cent in April, reaching USD 96.8 billion. This represents the widest gap since October and surpasses all estimates.