Inflation rose slightly in April, reflecting the challenge for the Fed

A measure of inflation most closely watched by Federal Reserve officials accelerated in April, reflecting the difficult path ahead for economic policymakers as they debate whether to raise rates again of interest to bring down stubborn price increases.

The personal consumption expenditure index climbed 4.4% in April a year earlier. This is a slight increase from March, when prices rose 4.2% on an annual basis. Still, prices are not climbing as fast as they were in February, when the index rose 5.1% on an annual basis.

A ‘core’ measure that attempts to gauge underlying inflation trends by removing volatility in food and energy prices rose 4.7% in the year to April, up slightly from March’s 4.6%.

The basic measure rose 0.4% in April from the previous month, down from 0.3% in March. It was slightly faster than some analysts expected. Core inflation had risen at a faster pace earlier in the year, climbing 0.6% in January.

The data reflects the recent moderation in price gains from previous months, but it also underscored how stubborn inflation has been. That could complicate the way forward for Fed officials, who began raising interest rates last year to cool the economy and slow price growth.

Headline inflation figures were heading in the “wrong direction for the Fed,” said Diane Swonk, chief economist at KPMG, who added that the data underscored how price pressures were becoming more persistent. She said she expected Fed officials to have a ‘heated debate’ over whether to take a break in June, which would depend in part on negotiations over raising the cap debt, but the latest inflation data has made the case more difficult.

The White House and Republicans are trying to reach an agreement to raise the borrowing limit before June 1, when the United States may run out of cash to pay all its bills on time. Failure to raise the debt ceiling in time to avoid a US debt default risks sending the economy into a tailspin.

“If we can eliminate the debt ceiling, that opens the door for another hike in June,” Ms Swonk said. She added that Fed officials could skip next month and leave rates unchanged, but she expected the central bank to raise rates again at least twice more later in the year.

Prices for basic services excluding housing costs, a measure the Fed and economists are watching closely, rose 0.42%, the biggest increase in three months, said Ian Shepherdson, chief economist at Pantheon Macroeconomics. . Policymakers are already expecting lower house prices later in the year, as real-time data from the private sector has recently shown a slowdown in rent increases.

“These data raise the risk that the Fed will hike again in June, although our base case scenario remains that rates will hold,” Shepherdson wrote in a note. If the jobs growth data, due out next Friday, showed a sharp rise in wage gains, he said that would change his outlook.

The Fed raised interest rates by a quarter point earlier this month, the 10th straight hike since last year. Policymakers have hinted they may delay another increase when they next meet on June 13-14. Minutes from the Fed’s latest meeting showed officials split on their next move, with many leaning toward a pause.

“Several participants noted that if the economy was moving in the direction of their current outlook, further policy firming after this meeting may not be necessary,” the minutes read.

Still, central bank officials have so far left the door open for another rate hike next month, reiterating that they will continue to monitor incoming data on inflation, the labor market and tightening. credit conditions following the recent bank failures.

A big wild card for the Fed is the edge of the abyss on the debt ceiling. Policymakers discussed the possibility in May, according to the minutes of that meeting, with many officials saying it was “critical that the debt ceiling be raised in a timely manner” to avoid the risk of serious damage to the economy and shake up the financial markets.

Christopher Waller, a Federal Reserve governor, said in a speech Wednesday that another rate hike in June might be warranted, but it was too early to tell.

“Whether we should scale up or skip the June meeting will depend on how the data comes in over the next three weeks,” Waller said.

Although Fed officials noted that inflation had eased in recent months, they called it “too high” and far from the central bank’s 2% target.

They also acknowledged some cooling in the labor market, with the number of job vacancies having recently fallen. But Fed officials said labor market conditions were still too hot, pointing to solid monthly job gains, steady wage growth and an unemployment rate near historic lows.

Policymakers have repeatedly said that the labor market will need to ease to bring inflation back to normal. Officials acknowledge that wage gains did not initially cause the jump in price increases, but they fear that rapidly rising wage gains could make it harder to control inflation.

“A slack labor market, to help our fight against inflation, doesn’t necessarily mean a recession or big job losses,” Waller said. “But we need to see more easing than we’ve seen to help reduce the rate of inflation.”