The Fed’s favorite inflation gauge showed little progress last month

By Alicia Wallace, CNN

(CNN) — Inflation in April remained at the same stubbornly high level as in March. That means costs continued to rise too fast for consumers, and the Federal Reserve has more work to do in its fight against rising prices.

The Personal Consumption Expenditures price index — a closely watched inflation gauge that the Fed uses for its 2% target — rose 0.3% from the month before, resulting in an annual rate of 2.7% that matched March’s gain, according to Commerce Department data released Friday.

Food prices fell for the month; however, gas prices moved higher by 1.2%. Goods and services prices inched up by 0.2% and 0.3%, respectively. On an annual basis, services inflation is running at 3.9%, while goods inflation is nearly flat at 0.1%.

Excluding the more volatile categories of food and energy, the core PCE price index slowed for the month, rising 0.2% as compared to a 0.3% gain in March. On an annual basis, the core PCE price index held steady at 2.8% for the third consecutive month.

“Inflation stuck,” Steven Ricchiuto, US chief economist for Mizuho Securities USA, told CNN in an interview. “The economy is declining, it’s slowing to trend from above-trend, but it’s still an environment where there’s an exceptionally tight labor market and coming back to trend from above-trend doesn’t make you feel all warm and fuzzy that inflation is going to go down quickly.”

Although Friday’s report served as yet another reminder that slowing down inflation is a bumpy process, the results weren’t a complete surprise. Economists, by and large, weren’t expecting much of a meaningful shift in the inflation gauges.

Forecasts called for the monthly and annual increases in the overall and core index to be unchanged from March, according to FactSet consensus estimates.

“Core PCE inflation fell back to a 0.2% rounded change in April for the first time since late last year, but you might want to hold the applause as the three-digit change was 0.249%, where a mere hundredth [of a percentage point] separates a good from a bad core inflation outcome,” Chris Rupkey, chief economist with FwdBonds, wrote in a note issued Friday.

While the overall PCE price index is technically used as the Fed’s target rate, the core index has received more attention from Fed officials because it provides a clearer lens into how underlying inflation is behaving.

Sluggish spending and income

While inflation remained unchanged, that wasn’t the case for how Americans earned and spent.

Consumer spending also cooled for the month, rising just 0.2% as compared to the 0.7% increase recorded for March. Disposable income gains retreated as well, ticking up by 0.2% versus 0.5% in March.

When taking inflation into account, both spending and disposable incomes fell for the month, dropping 0.1%. The personal saving rate (savings as a percentage of disposable income) was unchanged at 3.6%, remaining at its lowest level for the year.

The PCE indexes are part of the Personal Income and Outlays report, which provides one of the most comprehensive looks at shifts in prices, including how consumers respond to them and how much consumers are spending, earning and saving.

Friday’s report was further confirmation that economic activity slowed in April, said Kathy Bostjanic, Nationwide’s chief economist.

Earlier this month, retail sales came in flat, and some of the nation’s biggest retailers and restaurants signaled that they were seeing consumers pull back.

That trend should continue, Bostjanic said.

“We expect personal income and consumer spending to register sluggish gains in the coming months as businesses reduce the amount of net new hiring and this pinches overall income gains and causes consumers to rein in their spending,” she wrote in commentary issued Friday.

The weaker spending likely keeps rate cuts on the table for 2024, Michael Pearce, deputy chief US economist for Oxford Economics, noted Friday.

“It will take a series of more favorable reports before the Fed feels confident enough to begin cutting interest rates,” he wrote. “With four more inflation reports to go between now and the September [Fed policymaking] meeting, we still think there is a good chance the Fed will cut rates at that meeting.”

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