Today’s third official report on US inflation for April (which is included in this release) was bad in no less than two respects. First, it confirmed the results of its two predecessors, which showed that US price increases have started to accelerate again after months of some evidence (never very convincing in my opinion) of a slowdown. Second, the numbers presented in this morning’s release were for the personal consumption expenditures (PCE) price index, the preferred gauge of the Federal Reserve, which is Washington’s main inflation-fighting agency.
So these grim statistics seem to convince the Fed to continue its policy of raising interest rates enough to dampen inflation by weakening US economic growth, which risks creating a recession. Previously, the central bank had strongly hinted that it might pause in the hope that it has already slowed economic activity enough to control prices without producing an actual recession throughout the economy (i.e. engineering a “soft landing”).
Now, justifying a pause has become especially difficult because each of the four measures of inflation presented in the PCE report worsened.
The month-over-month PCE jumped from an unrevised 0.1 percent in March to 0.4 percent, breaking a two-month series of sequential downward gains. Also, that April increase was the biggest since January’s 0.6 percent.
The annual headline PCE figures showed the same trend, but also revealed additional bad news. April’s 4.4 percent result also snapped a two-month easing streak and was the highest annual PCE reading since January’s 5.4 percent. The additional bad news? Revisions to these figures have been slightly negative, meaning that in this case, the annual headline PCE for January and February is considered to have been slightly worse than originally reported.
April also saw the end of a two-month stretch of improvement for the core PCE, which strips out results for food and energy costs because they are volatile for reasons that have little or nothing to do with the economy’s fundamental vulnerability to inflation.
April’s rate of 0.4 percent was also the highest since January’s (0.6 percent), and revisions have also been negative.
As for the basic annual PCE, the rate of 4.7 percent in April represented a rebound from 4.6 percent in March. But contrary to fluctuations in the other PCE measures, the annual base PCE has stuck in the range of 4.6 percent to 4.7 percent every month since last November.
For now, the main reason for all this inflation stickiness should be no mystery: consumers continue to spend heavily. In fact, as always, today’s PCE results came in alongside personal consumption data. And even when price increases are factored in, it rebounded in April from a 0.2 percent drop in February and flatlined in March to a 0.5 percent advance.
As a result, since the companies are not charities, they will continue to raise prices as long as their customers make clear their willingness to pay.
No one can doubt that the economy and therefore consumers face significant obstacles. The full effects of the Fed’s economic slowdown measures, including interest rate hikes and money supply cuts, generally take many months to appear. By all indications, the weaknesses in the banking system first revealed by the collapses of California-based Silicon Valley Bank and New York City’s Signature Bank are beginning to tighten the credit spigots for both consumers and businesses. And all that money pumped into the pockets of consumers by the various government stimulus measures passed since the CCP virus hit the nation is drying up.
But these funds are still sizeable by any realistic standard. Employment levels continue to rise beyond their pre-pandemic peaks, so wages and salaries continue to provide households with new cash flow. And even if President Biden accepts every single budget proposal from House Republicans in the current debt ceiling negotiations, federal discretionary spending (not to mention outlays for benefits like Social Security and Medicare) would continue to rise for most of the 10-year period that will be covered by a final deal. With inflation tailwinds like these blowing as well (complemented by pressures heading into the election year to keep consumers, and therefore voters, happy), I still can’t see how worryingly high prices and price hikes don’t start to become US economic features, not bugs,