Inflation inched higher in April, posing a challenge for the Fed

Inflation inched higher in April, posing a challenge for the Fed

A measure of inflation raised by Federal Reserve officials in April, indicating a tough road ahead for economic policymakers as they decide whether to raise interest rates again to tame stubborn price increases Can go

Personal consumption expenditure index climbed 4.4 percent in April from a year earlier, according to a Commerce Department report released Friday. This was a slight increase from March, when prices climbed 4.2 percent on an annual basis. Still, prices are not climbing as fast as they were in February, when the index rose 5.1 percent on an annual basis.

A “core” measure that tries to gauge underlying inflation trends by stripping out volatile food and energy prices rose 4.7 percent over the year through April, up slightly from 4.6 percent in March.

The core measure rose 0.4 percent from the previous month in April, up from 0.3 percent in March. That was slightly faster than some analysts expected. Core inflation was rising at a brisk pace earlier this year, climbing 0.6 per cent in January.

The data reflects a recent moderation in price gains compared to previous months, but also underscores how stubborn inflation has been. That could complicate the road ahead for Fed officials, who began raising interest rates last year in a bid to cool the economy and slow price growth.

According to the report, Fed officials are also keeping an eye on consumer spending and Americans’ income, both of which rose in April.

Consumer spending rose 0.8 percent in April as Americans shelled out for cars, restaurant meals, movie tickets and other goods and services. The increase followed two months of a slowdown in spending and exceeded forecasters’ expectations. After-tax income rose 0.4 percent, boosted by a strong job market that is pushing up wages and bringing more people into the workforce.

Consumers’ resilience is a mixed blessing for Fed officials, who worry that strong spending is contributing to inflation, but who also don’t want it to slow so fast that the economy slips into recession. It is unclear how long consumers can expect the economic recovery to continue. The pandemic has begun to erode savings accumulated by some households, and there are signs that companies are holding back on hiring.

The continued strength in spending and inflation is posing a challenge for the Fed, which has begun to weigh whether to halt, at least temporarily, what has been an aggressive move to raise rates over the past year. Interest rates are now above 5 percent for the first time in 15 years.

“The inflation numbers were going in the wrong direction for the Fed,” said Diane Swonk, chief economist at KPMG. He said he expected a “heated debate” over whether Fed officials should pause in June, which would partly depend on negotiations on raising the debt ceiling, but the latest inflation data made that case difficult to make. made.

The White House and Republicans are trying to reach an agreement to raise the borrowing limit before June 1, when the United States could run out of cash to pay all its bills in time. Failure to raise the debt ceiling in time to avoid default on the US debt is likely to lead to a recession in the economy.

“If we can eliminate the debt ceiling, that opens the door for another hike in June,” Ms. Swonk said. He said Fed officials could leave next month and leave rates unchanged, but he expected the central bank to raise rates at least twice again this year.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said prices of core services rose by 0.42 per cent, excluding the cost of housing. Policymakers are already anticipating a year-end easing of housing costs, as real-time private sector data showed a slowdown in recent rent increases.

“These data raise the risk that the Fed will hike again in June, although our base case remains that rates will be left on hold,” Mr. Shepherdson wrote in a note.

He said his outlook would change if job growth data, which are due to be released next Friday, show a larger increase in payroll gains.

The Fed raised interest rates by a quarter point this month, its 10th consecutive increase since last year. Policymakers have indicated they may hold off on another hike at their next meeting on June 13 and 14. Minutes of the Fed’s last meeting showed officials were divided on their next move, with many leaning toward a pause.

“Several participants noted that if the economy develops in line with their current outlook, there may not be a need for further tightening of policy after this meeting,” the minutes said.

Still, central bank officials have so far kept the door open for another rate hike next month, reiterating that they will monitor incoming data on inflation, the labor market and tightening credit conditions from recent bank failures. Will continue to do

A big wild card for the Fed is fragility on the debt ceiling. Policymakers discussed that possibility in May, according to the minutes of that meeting, with several officials saying that avoiding the risk of seriously damaging the economy and rattling financial markets “required that the debt ceiling be raised in a timely manner.” be increased by”.

Federal Reserve Governor Christopher Waller said in a speech on Wednesday that another rate hike may be needed in June, but it was too early to say.

“Whether we should hike or skip the June meeting will depend on how the data comes in over the next three weeks,” Mr Waller said.

Although Fed officials have noted that inflation has eased in recent months, they have called it “unacceptably high” and far from the central bank’s 2 percent target.

He also acknowledged some cooling in the labor market, as the number of job openings has declined recently. But Fed officials have said labor market conditions are still very warm, pointing to solid monthly job gains, steady wage growth and an unemployment rate near historically low levels.

Policy makers have repeatedly said that the labor market will need to soften in order to bring inflation back to normal levels. Officials acknowledge that wage hikes were not initially the cause of the price jump, but they worry that rapidly rising wage gains will make it more difficult to get inflation under control.

“A loose labor market, to help in our fight against inflation, does not mean a recession or big job losses,” Mr Waller said. “But we need to see a lot more easing than we’ve seen to help take the heat off inflation.”


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