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PCE Comes in Hot, Spending Increases.

PCE
  • April Personal Spending: +0.8% M/M vs. +0.4% expected and +0.1% prior (revised from 0.0%).
  • Personal Income: +0.4% M/M vs. +0.4% expected and +0.3% prior.
  • PCE Price Index+0.4% M/M vs. +0.3% expected and +0.1% prior.
    • +4.4% Y/Y vs. +4.3% expected and +4.2% prior.
  • Core PCE Price Index+0.4% M/M vs. +0.3% expected and +0.3% prior.
    • +4.7% Y/Y vs. +4.6% expected and +4.6% prior.
  • Durable Goods Orders (M/m) Apr || 1.1% (Actual) -1.0% (Forecast) 3.2% (Previous)
  • Core Durable Goods Orders (M/m) Apr || -0.2% (Actual) 0.0% (Forecast) 0.3% (Previous)

A key index of U.S. prices ticked higher, indicating that the economy continues to experience high inflationary pressures.

According to Friday’s government report, the index closely monitored by the Federal Reserve showed a 0.4% increase in prices from March to April, surpassing the previous month’s 0.1% rise. On a year-over-year basis, prices rose 4.4% in April, up from 4.2% in March. Although significantly lower than the 7% peak observed in June last year, this figure remains well above the Fed’s 2% target.

Despite the price rise, consumer spending surged by 0.8% from March to April, marking the largest increase since January. This indicates that consumers, particularly those with higher incomes, are still willing to spend despite the ongoing price hikes. Solid job gains and pay increases have contributed to the resilience of consumer spending, which plays a crucial role in driving the U.S. economy.

The FOMC is watching.

It’s important to note that the inflation gauge published on Friday, known as the personal consumption expenditures price index, is distinct from the more widely recognized consumer price index. The government’s earlier report this month revealed that the CPI increased by 4.9% in April compared to the same period last year.

Fed officials are currently engaged in a noisy debate about their next steps, following 10 key interest rate increases in the past 14 months. Several policymakers have expressed their preference for further rate hikes in the coming months. However, most observers expect the central bank to abstain from raising rates at its upcoming mid-June meeting, a stance that Chair Jerome Powell and other top policymakers seem to support.

FOMC Perspective.

Last week, Powell stated that with the benchmark rate already at a 16-year high of approximately 5.1%, Fed officials can afford to adopt a wait-and-see approach to assess the impact of these increases on the economy. It typically takes a year or longer for rate hikes to significantly slow down the job market and the overall economy.

The ultimate objective of the Fed is to increase borrowing costs for consumers and businesses, thus curbing spending, growth, and inflation. The rate hikes have led to a significant rise in mortgage rates, as well as increased costs for auto loans, credit card borrowing, and business loans.

Even officials who are inclined to skip a rate hike in June, such as Philip Jefferson, a member of the influential Board of Governors, have expressed disappointment over the limited slowdown in inflation. Much of the recent inflationary pressure can be attributed to persistently higher prices for services, including restaurant meals, hotel rooms, and auto maintenance.

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