The inflation rate, closely monitored 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 slow, at least for now.
The inflation figure, announced by the Ministry of Trade on Friday, is below the four-decade high of 6.6% set in March. Although high inflation is still causing difficulties for millions of households, any slowdown in price increases, if maintained, would provide some relief.
The report also showed that consumer spending rose at a healthy annual rate of 0.9% from March to April, outpacing the monthly inflation rate for the fourth time in a row. The continuing desire of consumers in the nation to continue spending freely, despite rising prices, helps sustain the economy. Yet all of these costs help keep prices high and can make the Federal Reserve’s goal of curbing inflation even harder.
“Inflation is finally slowing, but it’s a little 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 against Ukraine and COVID-19-related blockades in China could further exacerbate supply shortages and accelerate prices.
The resilience of consumers in the face of sharply higher prices suggests that economic growth is recovering in the current quarter of April-June. The economy contracted at 1.5% year on year in the first quarter, mainly due to growing trade deficits. But now analysts predict that on an annual basis it will grow by as much as 3% in the current quarter.
Americans have managed to continue spending, despite higher inflation, due to rising wages, savings stocks accumulated during the pandemic and the resumption of credit card use. Economists say these factors could boost spending and support the economy for most of this year.
Income rose 0.4% from March to April, according to Friday’s report, slightly faster than inflation. However, high inflation is forcing consumers to save less on average. Savings fell to 4.4 percent last month, the lowest level since 2008. But overall, Americans have amassed an additional $ 2.5 trillion in savings since the pandemic, and economists estimate the pile is slowly eroding.
Friday’s report showed that on a monthly basis, prices rose 0.2% from March to April, down from 0.9% from February to March. The increase in April is the lowest since November 2020.
With the exception of the variable food and energy categories, the so-called basic prices increased by 0.3% from March to April, corresponding to the increase from the previous month. Basic prices rose 4.9% from a year earlier, the first such decline since October 2020.
However, inflation remains painfully high and imposes a heavy burden, especially on lower-income households, many of them black or Hispanic. Growing demand for furniture, appliances and other goods, combined with a growl in the supply chain, began to cause price spikes about a year ago.
Consumers have shifted some of their costs from goods to services, such as airline tickets and entertainment tickets. This trend may help cool inflation in the coming months, although it is not clear how much.
Commodity prices, which were the main driver of inflation last year, fell 0.2% from March to April after jumping 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 clothes, appliances and computers has also fallen.
And retailers like Target are reporting growing stocks of TVs, patio furniture and other household goods as consumers shift their spending to travel and goods related to services such as luggage and restaurant gift cards.
These stores will probably have to offer discounts to clear inventory in the coming months. And carmakers are increasing production as some supply chains unravel and as they manage to hire more workers. Both trends could continue to reduce the cost of manufactured items.
Yet the cost of services such as dining in restaurants, airline tickets and hotel rooms is still rising, offsetting much of the relief from cheaper goods. And rising gas and food prices, exacerbated by Russia’s invasion of Ukraine, will keep inflation painfully high, at least until the summer. The average national price per gallon of gas has reached $ 4.60, according to AAA. A year ago it was $ 3.04.
President Jerome Powell has promised to continue raising the Fed’s key short-term interest rate until inflation “falls in a clear and convincing way”. These interest rate hikes have raised fears that the Fed, in a bid to slow borrowing and spending, could push the economy into recession. This concern has caused a sharp drop in stock prices over the past two months, although markets have risen this week.
Powell has signaled that the Fed is likely to raise its base rate by half a point in both June and July – twice the usual rate hike.
Most economists predict that inflation, measured by the Fed’s preferred indicator, will still be around 4% or higher by the end of this year. An increase in prices at this level is likely to mean that the Fed will still raise interest rates to reduce inflation to its 2% target.
The better-known inflation indicator, the consumer price index, also reported a slowdown earlier this month. The CPI jumped 8.3% in April from a year earlier, down from a 40-year high of 8.5% in March.
The inflation measure reported on Friday, called the Consumer Price Index, differs in several ways from the Consumer Price Index, which helps explain why it shows a lower inflation rate than the 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 covers only own costs, which have increased more in recent years. Rents, which are constantly rising, also carry less weight in the PCE than in the CPI.
The PCE price index also seeks to account for changes in the way people shop when inflation soars. As a result, it can catch on, for example, when consumers switch from expensive national brands to cheaper brands in stores.
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