An indicator of inflation closely monitored by the Federal Reserve rose 6.3% in April from the previous year, the first slowdown since November 2020 and a signal that high prices may finally moderate , at least for now.
The inflation figure reported by the Commerce Department on Friday was below the four-decade high of 6.6% set in March. While high inflation is still causing difficulties for millions of households, any slowdown in price increases, if maintained, would provide modest relief.
The report also showed that consumer spending rose at a good annual rate of 0.9% from March to April, surpassing the month-on-month inflation rate for the fourth consecutive time. The constant willingness of consumers in the country to continue to spend freely despite inflated prices is helping to sustain the economy. However, all this spending helps keep prices high and could make the Federal Reserve’s goal of controlling inflation even more difficult.
“Inflation is finally slowing, but it’s a little early for the top five,” said Bill Adams, chief economist at Comerica Bank.
Adams noted that gas and food prices had risen in May and that Russia’s war against Ukraine and the COVID-19 blockades in China could further disrupt supply shortages and cause prices to rise. ‘accelerate again.
Consumer resilience to much higher prices suggests that economic growth is recovering in the current April-June quarter. The economy contracted at an annual rate of 1.5% in the first quarter, mainly due to an increase in the trade deficit. But now analysts predict that it is growing at an annual rate of up to 3% in the current quarter.
Americans have been able to maintain spending, despite higher inflation, due to rising wages, savings saved during the pandemic, and a rise in credit card usage. Economists say these factors could increase spending and support the economy for much of this year.
Revenue rose 0.4% from March to April, Friday’s report showed, slightly faster than inflation. However, high inflation forces consumers, on average, to save less. The savings rate fell to 4.4% last month, the lowest level since 2008. Overall, however, Americans have amassed an additional $ 2.5 trillion in savings since the pandemic. and economists estimate that this pile is slowly eroding.
Friday’s report showed that month-on-month prices rose 0.2% from March to April, below the 0.9% rise from February to March. The April increase was the smallest since November 2020.
Excluding volatile food and energy categories, so-called base prices rose 0.3% from March to April, the same as the previous month’s increase. Basic prices rose 4.9% year-on-year, the first such drop since October 2020.
However, inflation remains painfully high and is inflicting a heavy burden, especially on low-income households, many of them black or Hispanic. Growing demand for furniture, appliances and other goods, combined with the thicknesses of the supply chain, began to drive up prices about a year ago.
Consumers have shifted part of their spending on goods to services such as airfare and entertainment tickets. This trend could help cool inflation in the coming months, although it is unclear how much.
Property prices, which were the main drivers of inflation last year, fell 0.2% from March to April after rising the previous month. Used car prices fell 2.3% in April, although they are still much more expensive than a year ago. The cost of clothes, appliances and computers also decreased.
And retailers like Target have reported an increase in stocks of TVs, patio furniture and other household items, as consumers have shifted their spending more to travel-related goods and services such as luggage. and restaurant gift cards.
These stores are likely to offer discounts to clear inventory in the coming months. And carmakers have increased production as some supply chains become entangled and have managed to hire more workers. Both trends could further reduce the cost of manufactured items.
However, the cost of services such as restaurant meals, plane tickets and hotel rooms continues to rise, offsetting much of the relief of cheaper products. And rising gas and food prices, exacerbated by Russia’s invasion of Ukraine, will keep inflation measures painfully high at least until the summer. The national average price of a gallon of gasoline has reached $ 4.60, according to AAA. A year ago, it was $ 3.04.
President Jerome Powell has pledged to keep raising the Fed’s key short-term interest rate until inflation “falls in a clear and convincing manner.” These rate hikes have sparked fears that the Fed, in its drive to curb debt and spending, could push the economy into recession. This concern has led to sharp falls in stock prices over the past two months, although markets have recovered this week.
Powell has indicated that the Fed is likely to raise its benchmark rate by half a point in both June and July, twice the size of the usual rate hike.
Most economists have predicted that inflation, as measured by the Fed’s preferred indicator, will still be around 4% or higher by the end of this year. Price hikes at this level would likely mean that the Fed will further raise interest rates to reduce inflation to its 2% target.
A better-known indicator of inflation, the consumer price index, also reported a slowdown in price gains earlier this month. The CPI rose 8.3% in April from the previous year, below the March 40 high of 8.5%.
The inflation measure reported on Friday, called the Consumer Spending Price Index, differs in several ways from the Consumer Price Index, which helps explain why it shows a lower level of inflation than the CPI.
The PCE is a broader measure of inflation that includes payments made on behalf of consumers, such as insurance-covered medical services or government programs. The CPI covers only out-of-pocket expenses, which have risen further in recent years. Rents, which are constantly rising, also carry less weight in the PCE than in the CPI.
The PCE price index also aims to take into account changes in the way people buy when inflation rises. As a result, it can catch on, for example, when consumers switch from expensive national brands to cheaper store brands.