By Lindsay Dunsmuir
(Reuters) – U.S. inflation followed a sideways trend in April, a worrying sign for the Federal Reserve that suggests the high pace of price increases could last longer than expected and raises doubts about how quickly the central bank can respond will be to lower the interest rate.
Friday’s Commerce Department report also showed tepid consumer spending, a wrinkle that could help combat Fed inflation or spark unrest if the economy cools too quickly.
“The longer market inflation hangs around 3%, the harder it becomes for the Fed to make the case for a rate cut. There is certainly nothing in these numbers that favors the idea of a Fed rate cut,” says Joseph Trevisani, a senior advisor. analyst at FXStreet.
The personal consumption expenditures (PCE) price index rose 0.3% last month, the Commerce Department’s Bureau of Economic Analysis said Friday, matching unchanged gains from March.
In the 12 months to April, the PCE price index rose 2.7%, after rising at a similar pace in March. Economists polled by Reuters had forecast interest rates would rise 0.3% monthly and 2.7% annually. The PCE price index is one of the inflation measures that the US central bank tracks for its 2% target. Monthly inflation rates of 0.2% over time are needed to bring inflation back to target.
U.S. Treasury yields fell on the report, while stock index futures recovered, suggesting stocks would open higher after two straight days of losses on Wall Street. The dollar was weaker overall.
Futures traders tied to the Fed’s policy rate maintained expectations that the central bank would start cutting rates in September.
The Fed has kept its policy rate in the 5.25%-5.50% range over the past ten months and was plagued by several stronger-than-expected inflation and labor market data from January to March, following more encouraging data in the fourth quarter of 2018 . last year.
However, earlier this month, monthly job growth figures for April provided some relief, with job growth at its lowest level in six months. Other data has also confirmed that consumers appear to be scaling back their spending.
Excluding volatile food and energy components, the PCE price index rose 0.2% in April after rising 0.3% in March. Core inflation rose by 2.8% year on year in April, similar to the increase in March. PCE services inflation excluding energy and housing rose 0.3%, after rising 0.4% in March.
The Fed has raised borrowing costs by 525 basis points since March 2022 in an effort to cool demand across the economy. Financial markets initially expected the first rate cut to take place in March, but it was subsequently postponed to June and now to September.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2%, compared with a downwardly revised 0.7% increase in March. Revised gross domestic product data released Thursday showed consumer spending fell to 2.0% in the first quarter, down from a robust 3.3% in the October-December period.
(Reporting by Lindsay Dunsmuir; Editing by Paul Simao and Chizu Nomiyama)
