Inflation rose 0.4% in April and 4.7% year-on-year, in keeping with the Fed’s key metric

Inflation remained stubbornly high in April, potentially increasing the chances that interest rates could stay high longer, according to a reading released on Friday and closely followed by the Federal Reserve.

The personal consumption spending price index, which measures a variety of goods and services and takes into account changes in consumer behavior, rose 0.4% for the month excluding food and energy costs, ahead of the Dow Jones estimate of 0.3%.

On an annual basis, the figure rose 4.7%, up 0.1 percentage point from expectations, the Commerce Department reported.

Including food and energy, headline PCE also rose 0.4%, up 4.4% yoy and up from 4.2% in March.

Despite the higher inflation rate, consumer spending remained stable and personal income increased.

The report showed that spending rose 0.8% for the month, while personal income rose 0.4%. Both numbers were expected to rise 0.4%.

Price increases were spread almost evenly, with goods up 0.3% and services up 0.4%. Food prices fell less than 0.1%, while energy prices rose 0.7%. On an annual basis, goods prices rose 2.1% and services rose 5.5%, another indication that the US is turning back towards a service-oriented economy.

Food prices rose 6.9% yoy, while energy prices fell 6.3%. Both monthly PCE gains were the highest since January.

Markets barely reacted to the news and stock market futures pointed to a rise as investors focused on improving prospects for a debt ceiling deal in Washington. Government bond yields were mostly higher.

Impact on the Fed

“With today’s PCE report coming in hotter than expected, the Fed’s summer holiday may need to be cut short as consumer furlough spurs spending,” noted George Mateyo, chief investment officer at Key Private Bank. “Ahead of today’s release, we think the Fed was hoping to take the summer off (meaning pausing and re-evaluating), but now it seems the Fed’s job of bringing down inflation isn’t over yet. “

The report comes just weeks ahead of the Fed’s June 13-14 monetary policy meeting.

The Fed is targeting an annual inflation rate of around 2%, meaning current levels remain well above target and increasing the likelihood that the aggressive moves the central bank has been taking over the past year or so could remain intact.

One way the Fed’s rate hikes are supposed to work is by cutting demand. However, April spending figures show that despite higher interest rates and strong inflation, consumers continued to spend, meaning policymakers may have busier work to do.

Immediately after the report, market prices swung to a 56 percent chance that the Fed will announce another quarter-point rate hike at the June meeting, according to CME Group. Until then, there are only two important inflation-related data points, namely the May non-farm payrolls report, which is due next Friday, and the CPI, which is due on June 13th.

Along with the surge in consumer spending, demand for durable goods unexpectedly rose 1.1% in April, according to a separate report from the Department of Commerce. Economists polled by Dow Jones had expected a 0.8% decline. Excluding the transport sector, which grew by 3.7%, new orders fell by 0.2%.

Consumers had to resort to savings to keep spending going. The personal savings rate of 4.1% represented a decline of 0.4 percentage points from March.

The data comes amid a high level of uncertainty about how the economy will develop from here. Expectations for a recession later this year are high amid rising interest rates, an expected credit crunch in the banking sector and consumer pressures on multiple fronts.

However, a report on Thursday showed that the economy grew faster than originally reported in the first quarter, with real GDP expanding by 1.3% on an annualized basis, compared with the previous estimate of 1.1%.

However, real gross domestic income fell 2.3% in the quarter. The GDI measures all of the money earned on goods and services and usually moves in relation to GDP. According to the Department of Commerce, the average of the two metrics yields a quarterly growth decline of 0.5%.

At the same time, the goods trade deficit rose 17% to $96.8 billion in April, according to Commerce’s advanced economic indicators report released on Friday. Exports have a net negative impact on GDP.

Still, economists at Citigroup expect the Fed to raise its inflation and GDP forecasts when it releases its updates at the June meeting.

Minutes from the Fed’s May meeting, released on Wednesday, showed policymakers divided on their next move as members sought to offset better-than-expected inflation against spillovers from banking sector woes.

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