Spending boom fuels surprise April inflation jump

Price growth and consumer spending were hotter than expected in April, according to data the Commerce Department released Friday, and the U.S. economy continues to show strength in the face of 10 straight interest rate hikes by the Federal Reserve.

Consumer prices rose 0.4 percent in April, according to the personal consumption expenditures (PCE) price index, rising to a 4.4 percent annual rate.

Analysts expected a bump in the road for April, predicting PCE to rise to 4.3 percent annually from the 4.2 percent rate recorded in March.

Taking out the particularly volatile categories of food and energy, the PCE price index rose by an even higher 4.7 percent annually. But averaging it out on a three-month annualized basis, the “core” price growth fell to 4.3 percent in April, down from 5 percent in March, suggesting the longer-term trend is still for lower prices.

Jump in spending, income pushed prices higher

A jump in personal income and consumer spending, which rose a substantial 0.8 percent in April, helped fuel higher prices last month.

Household incomes rose 0.4 percent in April but remained flat when adjusting for higher prices.

Consumer inflation has been coming down steadily throughout the economy since the middle of last year.

The PCE price index topped out at 7 percent annually in June, and the consumer price index (CPI) hit 9.1 percent annually in the same month.

But PCE has proved stickier than CPI, with slight increases in September 2022 and January 2023.

Why stubborn inflation is sticking around

The reason for inflation following the global economic shutdowns caused by the coronavirus pandemic has been widely described as “too much money chasing too few goods,” but the reality is more nuanced than that.

A first inflationary phase took hold in 2021 caused by supply chain snags that raised prices for manufacturers and shippers, mostly in the durable goods sector, which then were passed onto shoppers.

The war in Ukraine prompted a second phase concentrated in energy commodities, which reverberated through many other sectors. Then came a third phase, in which price-setting firms in concentrated markets kept their prices higher simply because they could.

The Fed and central banks across the world responded to these waves by raising interest rates and reducing the assets on their balance sheets in one of the fastest monetary tightening cycles in decades. 

Global economists noted at the time that the effects of this tightening wouldn’t directly affect the supply-driven causes of inflation, but they would work by resetting expectations and putting pressure on labor markets.

“Under these circumstances, continued monetary tightening — through rising central bank rates and the normalization of their balance sheets — will have little direct impact on the supply sources of inflation and will instead work indirectly to re-anchor inflationary expectations by further reducing investment demand and pre-empting any incipient labour market pressures,” U.N. economists wrote in 2022.