A price gauge closely monitored by the Federal Reserve cooled slightly last month, a sign that inflation may be easing after running high in the first three months of this year.
Friday report from the Commerce Department showed that an index that excludes volatile food and energy costs rose 0.2% from March to April, compared with 0.3% in the previous month. It was the mildest increase so far this year.
“The main PCE inflation gauge cooled in April, a welcome result after a warm-up in the first quarter,” said Kathy Bostjanic, national chief economist. “That said, Fed officials will need more than a month of better inflation data to sustain inflation enough to start cutting rates later this year,” she said.
Measured compared to twelve months earlier, these so-called 'core prices' rose by 2.8% in April, the same as in March. Headline inflation rose by 0.3% from March to April, the same as in the previous month, and by 2.7% from a year earlier, also unchanged from the March figure.
The Fed tends to favor the inflation gauge the government released Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index attempts to account for changes in the way people shop when inflation rises. For example, it can identify when consumers switch from more expensive national brands to cheaper store brands.
Friday's report also showed that income growth slowed in April and spending cooled sharply, a trend that could help moderate economic growth and inflation in coming months and possibly appease the Fed. Policymakers have said they need to see at least some dovish inflation reports before they feel comfortable cutting rates.
Fed Chairman Jerome Powell has said he expects inflation to continue to decline this year but should gain “more confidence” in that forecast based on upcoming inflation reports.
According to Friday's report, grocery prices fell last month, although they are still significantly higher than before the pandemic. So the prices of durable goods, led by cheaper new and used cars, furniture and appliances. The cost of used cars has fallen by almost 5% in the past year.
However, gas prices rose 2.7% from March to April alone. Likewise, the costs of many services were rising faster than the Fed would like. Restaurant meals, for example, rose 0.3% from March to April and are 4% higher than a year earlier. Entertainment prices, including films and concerts, rose 7.4% compared to twelve months earlier.
Inflation fell sharply in the second half of last year, but then leveled off above the Fed's 2% target in the first few months of 2024. Now polls show higher rents, groceries and gasoline are angering voters as the presidential campaign intensifies, Donald Trump and his Republican allies have tried to shift the blame to President Joe Biden.
'An important question for the Fed that has been raised within the Fed [Federal Open Market Committee] and there are also questions among former Fed officials about whether the focus on achieving 2% is appropriate and whether 2.5-3% is a more realistic goal,” Quincy Krosby, Chief Global Strategist for LPL Financial, said in a note.
“Still, the market sees one more rate cut later this year and given the Fed's latest commentary, the majority of Fed speakers agree. The broader demand is now 2% sacred,” she said.
“The biggest concern is whether current policies punish those who can least afford higher interest rates, coupled with even higher prices.”
In recent weeks, a flurry of comments from Fed officials have underscored their intention to keep borrowing costs high for as long as necessary to completely beat inflation. As recently as March, Fed policymakers had collectively predicted three rate cuts this year, starting as early as June. Still, Wall Street traders now expect just one rate cut this year, in November.
An influential Fed official, John Williams, president of the Federal Reserve Bank of New York, said Thursday he expects inflation to cool again in the second half of the year. Until then, however, Fed Chairman Jerome Powell has made it clear that the central bank is willing to keep its key interest rate at 5.3%, the highest level in 23 years.
The central bank raised its benchmark interest rate from near zero to its current 15-month peak, the fastest rise in four decades, to try to curb inflation. The result is significantly higher interest rates for mortgages, car loans and other forms of consumer and business loans.
