Federal Reserve’s Preferred Inflation Gauge Rises, Fueled by Higher Energy Prices

A woman shops while holding her child in a supermarket in Albany, Western Australia, on April 11, 2024. Susan Mortimer/The Epoch Times

The Federal Reserve’s preferred inflation gauge rose in April, highlighting persistent price pressures throughout the U.S. economy, suggesting that the progress on inflation has stalled.

The personal consumption expenditures (PCE) price index jumped by 0.3 percent in April, unchanged from the previous month, according to the Bureau of Economic Analysis (BEA). That was in line with market expectations.

Within the PCE report, goods prices rose by 0.2 percent, and prices for services swelled by 0.3 percent. Food costs slipped by 0.2 percent, while energy prices popped by 1.2 percent.

On an annualized basis, PCE inflation was flat at 2.7 percent.

The three-month annualized rate was 3.5 percent, the highest since the second half of 2023. The six-month annualized PCE was 3.2 percent, the highest since July.

While energy prices have cooled in recent weeks, crude oil prices are still up by about 10 percent this year. Gasoline prices have also dipped below $3.56 following the springtime meteoric ascent.

Core PCE, which strips the volatile energy and food components, edged up by 0.2 percent, down from the 0.3 percent increase in March. This was also slightly below the consensus estimate of 0.3 percent and represented the softest print since November.

Annual core PCE was unchanged at 2.8 percent and matched economists’ expectations. This is still the lowest level since March 2021.

BEA data show that personal income rose by 0.3 percent, matching the consensus projection. Personal spending jumped at a lower-than-expected pace of 0.2 percent.

The U.S. central bank prefers the PCE because it contains a broader subset of goods and services prices, reflects spending from rural and urban consumers, and is updated more frequently.

Cumulative and persistent above-trend inflation continues to impact U.S. households.

A new Fed study reported that nearly two-thirds (65 percent) of Americans say high inflation has worsened their financial situation. Almost a fifth (19 percent) noted that rising prices made their financial health “much worse.”

Market Reactions

The financial markets erased their losses before the opening bell, with the leading benchmark indexes up by as much as 0.2 percent.

U.S. Treasury yields turned negative after the PCE data. The benchmark 10-year yield shed 3.4 basis points to 4.52 percent. The two-year yield fell to 4.91 percent.

The U.S. Dollar Index, a measurement of the greenback against a basket of currencies, added to its losses and hovered at about 104.5.

What the Fed Has Been Saying

A wave of Fed officials have addressed the pause in cooling inflation trends, arguing that the last mile in the fight will be slow.

However, inflation has spooked some monetary authorities so much that “various” officials at the April–May policymaking meeting were willing to pull the trigger on another quarter-point rate increase if inflation fails to reach the central bank’s 2 percent target.

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the meeting minutes read.

Minneapolis Fed President Neel Kashkari and Fed Gov. Michelle Bowman have indicated that they haven’t taken a rate hike off the table.

Others don’t believe it will be necessary.

New York Fed President John Williams told the Economic Club of New York that inflation pressures will ease in the second half of 2024.

“I see some of the recent inflation readings as representing mostly a reversal of the unusually low readings of the second half of last year, rather than a break in the overall downward direction of inflation,” Mr. Williams said in a prepared speech on May 30.

“With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year.”

Dallas Fed chief Lorie Logan conceded that she is concerned about the upside risks to inflation and noted that monetary authorities need to keep their options on the table.

“It’s really important that we don’t lock into any particular path for monetary policy,” Ms. Logan said. “I think it’s too soon to really be thinking about rate cuts.”

Citing the Bloomberg Economics Fed Sentiment National Language Processing Model, Apollo chief economist Torsten Slok suggested that central bank policymakers are shifting toward a tightening bias.

“The bottom line is that this Fed sentiment model using data back to 2009 shows that Fed communication continues to favor Fed hikes rather than Fed cuts,” Mr. Slok said.

Investors don’t see the first rate cut until later this year, with the futures market now penciling in a reduction at the November Federal Open Market Committee meeting, according to the CME Fed Watch Tool.

A minuscule percentage of traders are forecasting a 25-basis-point rate increase.

The next two-day Fed meeting will be held on June 11 and 12.