The Fed’s Preferred Inflation Measure Remained Flat in April

Inflation remained essentially flat in April while showing signs of downward progress, the Commerce Department reported Friday, in a closely watched measure that will guide the Federal Reserve in any decision to loosen interest rates in the coming months.

The Personal Consumption Expenditures price index rose 2.7 percent from a year earlier, the same level as in March. After stripping out volatile food and fuel prices for a clearer reading of price trends — called the core index — inflation remained steady at 2.8 percent on an annual basis.

On a monthly basis, inflation also remained flat, with prices rising 0.3 percent in April. That “core” index moderated slightly, rising 0.2 percent from the previous month, compared with 0.3 percent in March. That was the best monthly core reading since December 2023.

“The second quarter is off to a slow start, with declines in consumer spending and real incomes,” said Bill Adams, chief economist with Comerica Bank. “A margin of slack is opening in the U.S. economy, and that’s making it harder for businesses to pass on price increases to their customers, and that’s going to slow inflation.”

The numbers were largely in line with expectations and are unlikely to change the Fed’s calculus as it waits for firmer evidence that inflation is headed back toward its 2 percent target.

After falling rapidly last year, inflation has leveled out through the spring months, propelled by a number of sticky categories that have prevented price growth from slowing to the degree that Fed officials would like.

To some extent, that reflects what some have called “catch-up inflation,” as industries like health care and insurance — which don’t change prices as smoothly as manufacturing, for example — start passing along increases in their own costs. Services continue to power price increases, while goods have flattened out and even declined in price.

Anecdotal evidence points to companies having more difficulty extracting further price increases. The Fed’s Beige Book, a compendium of conversations with contacts across the country, noted this week that retailers were discounting inventory. “Contacts in most districts noted consumers pushed back against additional price increases, which led to smaller profit margins as input prices rose on average,” the report read.

Still, getting all the way back down to 2 percent inflation is starting to look more difficult. Factors that had pushed up prices, such as supply chain snags, have largely been resolved. Economists at the Cleveland Fed recently estimated that it could take several years, as “intrinsic” inflationary forces persist.

Fed officials may see weakening demand as one sign that inflation is poised to fade further. Consumer spending growth has been slowing gradually but remains above prepandemic levels, while retail sales have plateaued. Overall economic growth slowed markedly in the first quarter.

In the April report, consumer spending slowed even more, rising 0.2 percent from the previous month, not adjusted for inflation. Spending for the services sector came in lower than expected, which comports with a recent business survey showing contracting activity for the first time in a year and a half.

Disposable personal income also slowed to 0.2 percent, leaving the personal saving rate at 3.6 percent — flat from the previous month, but a drop from 5.2 percent a year earlier.

Tax refunds were smaller last month than they have been in previous years, which may have deterred people from making large purchases with their checks from the Internal Revenue Service.

Still, spending remains healthy. One factor powering continued demand even as incomes moderate: The stock market has been strong and home prices are high, giving well-off consumers the confidence to take lavish vacations and buy new cars, even as delinquency rates rise for those who have maxed out credit cards.

“Consumers are borrowing because they can, because their balance sheets are so healthy,” said Yelena Shulyatyeva, a senior U.S. economist at BNP Paribas. “The ‘wealth effect’ is making them believe they can do it.”

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