US inflation picks up; slowing economy likely to curb rise

WASHINGTON. US consumer prices increased by the most in 15 months in April, which could support the Federal Reserve’s contention that recent low inflation readings were transitory and allow the central bank to keep interest rates unchanged for a while.

But gains in inflation are likely to be limited as the report from the Commerce Department on Friday also showed a deceleration in consumer spending last month, the latest indication that economic growth was slowing after a temporary boost from exports, inventories and defence spending in the first quarter.

Low inflation together with slowing economic growth have led to calls, including from President Donald Trump, for the Fed to cut rates. Fed Chairman Jerome Powell has maintained the soft readings “may wind up being transient.” The Fed this month kept rates unchanged and signalled little inclination to adjust monetary policy anytime soon.

The personal consumption expenditures (PCE) price index increased 0.3 per cent last month, the biggest gain since January 2018, after rising 0.2 per cent in March. That lifted the annual increase in the PCE price index to 1.5 per cent from 1.4 per cent in March.

Excluding the volatile food and energy components, the PCE price index gained 0.2 per cent last month after edging up 0.1 per cent in March. In the 12 months through April, the so-called core PCE price index increased 1.6 per cent after rising 1.5 per cent in March.

The core PCE index is the Fed’s preferred inflation measure.

It hit the US central bank’s 2 per cent inflation target in March 2018 for the first time since April 2012.

A much weaker inflation pulse than initially thought in the first quarter had led economists to anticipate that the annual core PCE price index would remain at 1.5 per cent in April.

The dollar pared losses against a basket of currencies following the release of the data, while US Treasury prices were trading higher.

Consumer spending cools

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.3 per cent as consumers cut back purchases of long-lasting manufactured goods such as motor vehicles. They also spent less on services, including household electricity and gas.

Data for March was revised up to show consumer spending jumping 1.1 per cent, the biggest increase since August 2009, instead of the previously reported 0.9 per cent rise. Economists polled by Reuters had forecast consumer spending would advance 0.2 per cent in April.

When adjusted for inflation, consumer spending was unchanged in April. This so-called real consumer spending rose 0.9 per cent in March. The weak real consumer spending in April added to soft reports on industrial production, orders for long-lasting manufactured goods and home sales in suggesting slower economic growth in the second quarter.

Consumer spending increased at a 1.3 per cent annualised rate in the first quarter, the slowest in a year. The overall economy grew at a 3.1 per cent rate last quarter, flattered by the volatile exports, inventory and defence components. Growth estimates for the April-June quarter are below a 2.0 per cent rate.

Still, consumer spending remains supported by a strong labour market. The lowest unemployment rate in nearly 50 years is steadily pushing up wages. Last month, personal income rose 0.5 per cent in April after ticking up 0.1 per cent in March. Wages rose 0.3 per cent in April. Savings increased to $990.3 billion in April from $963.7 billion in March.