Inflation, consumer spending ticked up in April: PCE

Consumer sentiment fell in May, indicating growing anxiety about a downturn.


Summer is here, but with it comes a reminder that the economic picture isn’t changing for the consumer.

On Friday, new data from the Personal Consumption Expenditures Index showed that core inflation ticked up to 4.7% year-over-year in April, up slightly from 4.6% in March. On a monthly basis, core inflation rose 0.4%, compared with 0.3% in March.

The increase means inflation showed signs of growing in April, even as the narrative presented in recent months has been one of slowing price increases.

Meanwhile, consumer spending jumped 0.8% on a monthly basis. It’s a sign that people are continuing to shop, even as inflation hangs around like the humidity in August.

What it means for the Fed: The inflation uptick gives the Federal Reserve new challenges as it weighs whether to pause a monthslong campaign of interest rate hikes that are designed to bring down inflation. Inflation had been cooling as the Fed lowered the size of the hikes in recent months. Now, it is considering whether to stop the hikes, but is confronted with fresh evidence that inflation moved back up. Should it do more to cool inflation? It's a tricky question, especially given the fact that interest rate hikes take months to work their way through the economy. While PCE is the preferred measure of inflation by the Fed’s key committee, members will have fresh data on inflation and consumer spending from other indices, such as the Consumer Price Index, that are set to be released in the next two weeks when they meet on June 13.

Consumer sentiment drops

Elsewhere, there are signs that the consumer mood is starting to dampen. Consumer sentiment fell 7% in May, as the debt ceiling crisis dragged down spirits. The University of Michigan’s index had been rising for months after hitting all-time lows in June 2022. But May’s decline erased half of the gains made in that time.

In particular, consumers appear to be fearing a rough road ahead. Consumers’ outlook for the year ahead fell 17%, while long-run expectations plunged 13%.

“Consumers are concerned that any recession to come may cause lasting pain,” wrote University of Michigan Survey of Consumers Joanne Hsu.

Notably, however, there were more stable views on inflation. Expectations for the year ahead fell to 4.2%, as compared with 4.6% last month. Uncertainty about inflatin also fell significantly to its lowest level in nearly two years.

“This suggests that consumer views over short-run inflation may be stabilizing following four months of vacillation,” Hsu wrote.

Long-run inflation expectations remained within the range of 2.9%-3.1%, as they have been for months.

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