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The Commerce Department reported Friday that one of the key inflation indicators rose faster than expected by 3.1% in April as price pressures intensified in the fast-growing US economy.
The core PCE index was expected to rise 2.9% after rising 1.9% in March. Fed officials consider the measure the best measure of inflation, although they do keep an eye on a number of metrics.
As part of its mandate on price stability, the Fed considers 2% healthy, although it is committed to leaving the average level above normal in favor of a full employment promotion.
The index captures price movements across a variety of goods and services and is generally considered a broader measure of inflation because it captures changes in consumer behavior and has a wider range than the Labor Department’s Consumer Price Index. The CPI accelerated by 4.2% in April.
Over the past month, core personal consumption expenditures rose 0.7%, which is also faster than the expected 0.6%.
Including volatile food and energy prices, the core PCE index jumped 3.6% year-on-year and 0.6% from March.
“Inflation pressures may get worse before they improve,” wrote Anita Marcoska, an economist at Jefferies, indicating that lower retail inventories could push prices higher. She added that the shift in consumer spending from goods to services would ultimately reduce inflationary pressures.
Despite the hot inflation reading, government bond yields were mostly lower while stocks were higher as the Memorial Day weekend approaches.
In other economic news, Chicago’s manufacturing reading came in above the expected 75.2, its highest level since November 1973. Also, the University of Michigan consumer confidence reading for the month of May fell to 82.9, lower than the previous estimate of 83 88.3.
This increase in inflation came along with a sharp slowdown in personal income which decreased by 13.1%. But that was actually under the estimate of 14%. Personal income rose 20.9% in March after the latest round of government stimulus checks.
Even with personal income falling by $ 3.2 trillion, the savings rate remained high at 14.9%. Consumer spending increased 0.5%, in-line with estimates.
Personal disposable income, after taxes and other deductions, decreased by 14.6%.
Despite the consistent pace of the increase in inflation, most Fed officials remain reluctant to change policy.
The central bank buys at least $ 120 billion in bonds every month and has kept benchmark short-term borrowing rates steady near zero even with a bull economy.
There have been some indications recently that the Fed is at least ready to start talking about reducing the pace of asset purchases, but any real action is likely months away. Central bankers see the ongoing price pressures as temporary, due to supply chain bottlenecks and the comparisons of a year ago when the economy was largely closed.
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