Dive Brief:
- Inflation rose last month at the fastest rate since May 2023, outpacing growth in personal income and prompting a slowdown in consumer spending.
- The personal consumption expenditures index — a gauge of price pressures monitored by the Federal Reserve — increased in April at a 3.8% annual rate, eroding inflation-adjusted personal income by 0.5%, the Bureau of Economic Analysis said Thursday. Inflation-adjusted consumer spending edged up just 0.1% and the personal saving rate fell to 2.6%, the lowest level since 2022.
- “We need to get inflation back under control and ideally do that in a way that preserves or improves growth,” Northlight Asset Management Chief Investment Officer Chris Zaccarelli said, noting that the BEA on Thursday marked down first quarter gross domestic product growth to 1.6% from 2%. “Those that are counting on a [Fed] rate cut in the second half of this year, they can forget it,” he said in a note.
Dive Insight:
The war-induced surge in oil prices has begun to nudge up costs beyond the gas pump, with so-called core PCE, excluding volatile energy and food prices, gaining 3.3% in April, the fastest pace since November 2023.
Rising price pressure is bad news for the Fed, which has failed for five years to curb inflation to its 2% target.
Several central bank officials in recent weeks have voiced openness to ditching a bias toward interest rate cuts and considering an increase in borrowing costs instead.
“Inflation is meaningfully above target, inflation expectations have been creeping higher and the public is highly sensitive to rising prices,” St. Louis Fed President Alberto Musalem said Thursday.
“In this environment, if central bankers tolerate higher inflation today based on the hope of lower inflation in the future, the people we serve may lose confidence in our commitment to see inflation return to target,” he said in a speech.
“Moving or holding policy rates too low could actually cause longer-term interest rates to rise,” he said. “That would discourage investment and have detrimental effects on economic growth and employment.”
Three other Fed regional bank presidents dissented against a central bank policy statement on April 29, seeking to scuttle wording indicating that the Fed leaned toward trimming the federal funds rate.
Inflation has picked up in the past several months, spurred by the highest tariffs since the 1930s and a sudden plunge in the supply of oil after the U.S. and Israel launched air strikes on Iran in late February.
Futures for Brent crude oil, the global benchmark, have surged by about 34% since the Feb. 28 start of the war, from $70 per barrel to $93.81 per barrel.
Beset by rising prices, CEO optimism plunged this quarter compared with Q2, with 40% of chief executives anticipating that economic conditions will grow more grim compared with 13% last quarter, the Conference Board said Thursday, reporting on results from a May 4-18 survey.
“CEOs reported that the economy is materially worse now than it was six months ago and expected economic conditions to weaken further over the next six months,” Conference Board Chief Economist Dana Peterson said.
Nearly two out of three CEOs (62%) ranked geopolitical turmoil as a high risk for their industry, the Conference Board said, noting that CEOs also see energy supply and supply chains as much bigger vulnerabilities than during Q1.
