Inflation remained essentially stable in April, although it showed signs of downward progress, the Commerce Department reported Friday, in a closely watched measure that will guide the Federal Reserve in any decision to relax interest rates in the coming years. months.
The personal consumption expenditure price index rose 2.7 percent year on year, the same level as in March. After excluding volatile food and fuel prices to get a clearer reading of price trends (called the core index), inflation remained stable at 2.8 percent annually.
On a monthly basis, inflation also remained stable, with prices rising 0.3 percent in April. That “core” index moderated slightly, rising 0.2 percent from the previous month, compared with 0.3 percent in March. That was the best monthly core reading since December 2023.
“The second quarter is off to a slow start, with declines in consumer spending and real incomes,” said Bill Adams, chief economist at Comerica Bank. “There is slack opening up in the U.S. economy, and that makes it harder for businesses to pass along price increases to their customers, and that will slow inflation.”
The numbers were largely in line with expectations and are unlikely to change the Federal Reserve’s calculations as it waits for firmer evidence that inflation is heading back toward its 2 percent target.
After falling rapidly last year, inflation has stabilized during the spring months, driven by a series of difficult categories that have prevented price growth from slowing to the degree that Federal Reserve officials would like.
To some extent, that reflects what some have called “recovery inflation,” as industries like health care and insurance (which don’t move prices as smoothly as manufacturing, for example) begin to pass on increases in their prices. own costs. Services continue to drive price increases, while goods prices have stabilized and even fallen.
Anecdotal evidence indicates that companies are having a harder time achieving larger price increases. The Federal Reserve’s Beige Book, a compendium of conversations with contacts across the country, noted this week that retailers were discounting inventory. “Contacts in most districts observed that consumers opposed further price increases, leading to lower profit margins as input prices increased on average,” the report said.
Still, getting back down to 2 percent inflation is starting to look more difficult. Factors that had driven up prices, such as supply chain issues, have largely been resolved. Economists at the Cleveland Fed recently estimated that this could take several years, as “intrinsic” inflationary forces persist.
Federal Reserve officials could see weakening demand as a sign that inflation is about to slow further. Consumer spending growth has been gradually slowing but remains above pre-pandemic levels, while retail sales have stagnated. Overall economic growth slowed noticeably in the first quarter.
In the April report, consumer spending slowed further, rising 0.2 percent from the previous month, unadjusted for inflation. Spending in the services sector was lower than expected, consistent with a recent business survey showing a contraction in activity for the first time in a year and a half.
Disposable personal income also slowed to 0.2 percent, leaving the personal savings rate at 3.6 percent, the same as the previous month but down from 5.2 percent a year earlier.
Tax refunds were smaller last month than in previous years, which may have discouraged people from making big purchases with their IRS checks.
Still, spending remains healthy. One factor driving demand continues even as incomes moderate: The stock market has been strong and home prices are high, giving wealthy consumers the confidence to take lavish vacations and buy new cars even as rates rise. Delinquency rates increase for those who have exhausted credit. cards.
“Consumers are borrowing because they can, because their balance sheets are very healthy,” said Yelena Shulyatyeva, U.S. economist at BNP Paribas. “The ‘wealth effect’ makes them believe they can do it.”