At a Glance

  • April inflation rose 3.8% year over year, the fastest since May 2023, outpacing personal income growth and causing consumer spending to slow.
  • The Bureau of Economic Analysis (BEA) reported Thursday that the Personal Consumption Expenditures (PCE) price index rose at an annualized rate of 3.8% in April, while inflation-adjusted personal income fell 0.5%; real consumer spending grew only 0.1%, and the personal savings rate dropped to 2.6%, the lowest since 2022.
  • Chris Zaccarelli, chief investment officer at Northlight Asset Management, said: "We need to control inflation and ideally do so in a way that maintains or improves growth." He noted that the BEA on Thursday revised first-quarter GDP growth down from 2% to 1.6%. He added: "Those hoping for the Fed to cut rates in the second half of this year can give up that hope."

In-Depth Analysis

The war-driven surge in oil prices has begun to push up costs beyond gasoline. Excluding volatile energy and food prices, core PCE rose 3.3% year over year in April, the fastest since November 2023.

Rising price pressures are bad news for the Federal Reserve, which has failed for five years to bring inflation down to its 2% target.

In recent weeks, several central bank officials have signaled a willingness to abandon their easing bias and instead consider raising borrowing costs.

St. Louis Fed President Alberto Musalem said Thursday: "Inflation is clearly above target, inflation expectations have been climbing, and the public is highly sensitive to rising prices."

In his remarks, he said: "In this environment, if central bank officials tolerate higher current inflation based on hopes that inflation will decline in the future, the people we serve may lose confidence in our commitment to achieving our inflation target."

"Keeping the policy rate too low or cutting it could actually lead to higher long-term interest rates," he said. "That would dampen investment and adversely affect economic growth and employment."

On April 29, three other regional Fed presidents dissented from the Fed's policy statement, seeking to remove language indicating a preference for lowering the federal funds rate.

The recent uptick in inflation has been driven mainly by the highest tariffs since the 1930s and a sharp drop in oil supplies following the U.S. and Israeli airstrikes on Iran in late February.

Since the war broke out on February 28, global benchmark Brent crude futures have surged from $70 per barrel to $93.81, a gain of about 34%.

Affected by rising prices, CEO optimism fell sharply this quarter compared with Q2. The Conference Board reported Thursday that, based on a survey conducted from May 4 to 18, 40% of CEOs expect economic conditions to worsen, up from 13% in the previous quarter.

Dana Peterson, chief economist at the Conference Board, said: "CEOs report that economic conditions are now significantly worse than six months ago and expect the economy to weaken further over the next six months."

The Conference Board said nearly two-thirds (62%) of CEOs cited geopolitical turmoil as a high risk to their industries, noting that CEOs see greater vulnerabilities in energy supply and supply chains than in Q1.