Inflation arrived hot for the second straight month in April inside the Federal Reserve’s metric that it uses to set policy while inflation-adjusted spending cooled, according to government data released Thursday.
With pricing dynamics continuing to show upward pressure, we have not yet witnessed the peak in either top-line or core inflation. The top-line personal consumption expenditures index increased by 0.4% in April. In March, it rose by 0.7%.
American households, which had no increase in income in April, drew down their savings to 2.6%, the lowest level since June 2022, from 3.6% in March, which in turn produced a restrained increase of 0.1% in inflation-adjusted spending.
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What is worse is that real personal income excluding government transfers declined by 0.4% and disposable income fell by 0.5%.
The latter declined for the third consecutive month, another sign of the real stress that is building inside American households.
The decrease in both categories of income points to a decline in real spending in May, which will dampen household spending and gross domestic product in the current quarter.
In addition, the increase in the core personal consumption expenditures index—our preferred gauge of longer-run inflation—will prove difficult to drive back down to anywhere near the Federal Reserve’s 2% target in the near term.
Should the war in the Middle East not be wrapped up soon, the Federal Reserve will find it difficult to look through the increase in inflation driven by the supply shock that followed the outbreak of hostilities three months ago.
While we do not anticipate a rate hike at the Fed’s next meeting on June 17, we do think that the July policy decision will be a live event.
The data
Top-line prices increased by 0.4% in April while core inflation advanced by 0.2%, which resulted in a 3.8% annual jump in the former and a 3.3% increase in the latter. The super-core index increased by 3.5% from one year ago.
On a nominal basis, personal income was flat while spending moved forward at a 0.5% pace.
Compensation, wages and salaries all increased by 0.2% on the month while personal income excluding government transfers declined by 0.4%.
Goods inflation rose by 4.8% from a year ago, durables by 3.4%, nondurables by 4.9% and services by 3.5%.
The takeaway
Signs of financial stress are building inside American households.
Inflation-adjusted spending, disposable income and income excluding government transfers point to a slowing in May spending as inflation approaches a peak on the back of a historic supply shock.
This strongly suggests that spending may slow from the tepid 1.4% pace during the first three months of the year and growth will slow in the current quarter from the 1.6% pace that was observed in the first quarter of the year.
