The key inflation indicator slowed to a still high 6.3% last year

An inflation indicator closely watched by the Federal Reserve rose 6.3% in April from a year earlier, the first slowdown since November 2020 and a sign that high prices may finally be moderating, at least for the moment.

The inflation figure The Commerce Department announced on Friday was below the four-decade high of 6.6% set in March. While high inflation continues to cause difficulties for millions of households, any slowdown in price increases, if prolonged, would bring some relief.

The report also showed that consumer spending grew at a healthy 0.9% annual rate from March to April, outpacing the inflation rate month-on-month for a fourth consecutive time. The continued willingness of consumers across the country to continue to spend freely despite inflated prices is helping to sustain the economy. Yet all of this spending is helping to keep prices high and could make the Federal Reserve objective of controlling inflation even harder.

“Inflation is finally slowing, but it’s a bit early for high-fives,” said Bill Adams, chief economist at Comerica Bank.

Adams noted that gas and food prices rose in May and that Russia’s war on Ukraine and COVID-19-related lockdowns in China could further disrupt supply shortages and cause it to accelerate again. the costs.

Consumer resilience in the face of sharply higher prices suggests that economic growth is rebounding in the current April-June quarter. The economy contracted to a 1.5% annual rate in the first quarter, mainly due to an increase in the trade deficit. But analysts now predict that, on an annual basis, it will increase by up to 3% in the current quarter.

Americans have been able to continue spending, despite higher inflation, due to rising wages, a stock of savings built up during the pandemic and a rebound in credit card use. Economists say these factors could boost spending and support the economy for much of this year.

Revenues rose 0.4% from March to April, according to Friday’s report, slightly faster than inflation. Yet 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 accumulated an additional $2.5 trillion in savings since the pandemic, and economists calculate that this pile erodes only slowly.

Friday’s report showed that month-over-month prices rose 0.2% from March to April, down from the 0.9% increase from February to March. April’s increase was the smallest since November 2020.

Excluding the volatile food and energy categories, so-called core prices rose 0.3% from March to April, matching the rise of the previous month. Core prices climbed 4.9% from a year earlier, the first such decline since October 2020.

Yet inflation remains painfully high, and it places a heavy burden especially on low-income households, many of whom are black or Hispanic. Growing demand for furniture, appliances and other goods, combined with supply chain grunts, started driving prices up about a year ago.

Consumers have shifted some of their spending from goods to services, such as airline tickets and entertainment tickets. This trend could help calm inflation in the coming months, although to what extent is unclear.

Goods prices, which were the main drivers of inflation last year, fell 0.2% from March to April after surging 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 clothing, household appliances and computers also fell.

And retailers like Target have reported an increase in inventory televisions, patio furniture and other home goods, as consumers shifted their spending more towards travel and service-related goods, such as luggage and restaurant gift cards.

These stores will likely need to offer discounts to eliminate inventory in the coming months. And automakers have ramped up production as some supply chain issues unravel and they’ve managed to hire more workers. Both trends could continue to drive down the cost of manufactured items.

Yet the cost of services such as restaurant meals, airline tickets and hotel rooms continue to rise, offsetting much of the relief from cheaper goods. And rising gas and food prices, compounded by Russia’s invasion of Ukraine, will keep inflation measures painfully high at least until the summer. The national average price for a gallon of gasoline reached $4.60, according to AAA. A year ago it was $3.04.

Chairman Jerome Powell has pledged to keep raising the Fed’s short-term policy rate until inflation “falls clearly and convincingly.” These rate hikes have raised fears that the Fed, in its drive to slow borrowing and spending, is pushing economy in recession. This concern has caused stock prices to fall sharply over the past two months, although markets have rallied this week.

Powell signaled that the Fed would likely raise its benchmark rate by half a point in June and July, twice the size of the usual rate increase.

Most economists expect inflation, as measured by the Fed’s preferred gauge, to still be around 4% or higher by the end of this year. Price increases to this level would likely mean that the Fed will raise interest rates further to bring inflation down to its 2% target.

A better-known inflation indicator, the consumer price index, also signaled a slowdown in price increases earlier this month. CPI jumped 8.3% in April compared to the previous yeardown from a 40-year high in March of 8.5%.

The inflation measure released on Friday, called the Personal Consumption Expenditures Price Index, differs in several ways from the Consumer Price Index, which is why it shows a lower level of inflation than the US. CPI.

PCE is a broader measure of inflation that includes payments made on behalf of consumers, such as medical services covered by insurance or government programs. The CPI only covers personal expenses, which have increased more in recent years. Rents, which increase regularly, are also less weighted in the PCE than in the CPI.

The PCE price index also seeks to account for changes in the way people buy when inflation jumps. As a result, it can capture, for example, when consumers switch from expensive national brands to less expensive private labels.

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