US inflation increases moderately; consumer spending boosts Q2 outlook
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[April 27, 2024] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. monthly inflation rose moderately in March,
but stubbornly higher costs for housing and utilities suggested the
Federal Reserve could keep interest rates elevated for a while.
The report from the Commerce Department on Friday, which also showed
strong consumer spending last month, offered some relief to financial
markets spooked by worries of stagflation after data on Thursday showed
inflation surging and economic growth slowing in the first quarter.
"Markets should breathe a sigh of relief this morning," said Chris
Zaccarelli, chief investment officer at Independent Advisor Alliance.
"Given the elevated levels of inflation, and this is the new normal for
2024, the market is going to need to get over hopes for Fed rate cuts."
The personal consumption expenditures (PCE) price index increased 0.3%
last month, matching the unrevised gain in February, the Commerce
Department's Bureau of Economic Analysis said. Goods prices edged up
0.1% as increases in the costs of gasoline, clothing and footwear were
partially offset by a decline in prices of motor vehicles and parts.
Services prices rose 0.4%, quickening from February's 0.3% advance. They
were boosted by a 0.5% increase in the cost of housing and utilities,
which include rents. Rents have remained sticky even as the supply of
apartments has increased and independent measures showed a decline in
rent demands.
Economists expect that these lower rents should start showing up in the
data at some point this year. Transportation services prices shot up
1.6%, while financial services and insurance were 0.5% more expensive.
In the 12 months through March, inflation rose 2.7% after advancing 2.5%
in February. The increase in inflation last month was broadly in line
with economists' expectations.
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There had been fears that inflation could exceed forecasts in March
after the release of the advance gross domestic product report for the
first quarter on Thursday showed price pressures heated up by the most
in a year.
The spike in inflation occurred in January. The PCE price index is one
of the inflation measures tracked by the U.S. central bank for its 2%
target. Monthly inflation readings of 0.2% over time are necessary to
bring inflation back to target.
U.S. Treasury prices rose, with the yield on the benchmark 10-year note
backing away from a five-month high reached in the previous session. The
dollar advanced versus a basket of currencies, while stocks on Wall
Street were trading higher.
Fed policymakers are expected to leave rates unchanged next week. The
central bank has kept its benchmark overnight interest rate in the
5.25%-5.50% range since July. It has raised the policy rate by 525 basis
points since March 2022.
Financial markets initially expected the first rate cut to come in
March. That expectation got pushed back to June and then September as
data on the labor market and inflation continued to surprise on the
upside.
A handful of economists continue to expect that borrowing costs may be
lowered in July on the belief that the labor market will slow noticeably
in the coming months. Others believe the window for rate cuts is rapidly
closing.
"Fed officials will likely not have enough evidence based on inflation
data alone to cut rates as soon as June," said Veronica Clark, an
economist at Citigroup. "But we continue to think officials will be
increasingly uncomfortable leaving rates at restrictive levels for too
long and will find evidence in May and June inflation data to cut rates
in July."
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A man waits for customers next to his makeshift tent around Times
Square, in New York, U.S., December 25, 2023. REUTERS/Eduardo
Munoz/File Photo
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SERVICES INFLATION HOT
Excluding the volatile food and energy components, the PCE price
index increased 0.3% in March after rising by the same unrevised
margin in February. Core inflation increased 2.8% on a year-on-year
basis in March, matching February's advance.
PCE services inflation excluding energy and housing climbed 0.4%
after a 0.2% gain in February. The so-called super core inflation
rose 3.5% on a year-on-year basis in March.
Policymakers are monitoring the super core inflation to gauge their
progress in fighting inflation.
Consumer spending, which accounts for more than two-thirds of U.S.
economic activity, increased by a solid 0.8%, matching the rise in
February. The data was included in the GDP report, which showed
consumer spending moderating to a still-solid 2.5% pace in the first
quarter from the brisk 3.3% pace in the October-December period.
The economy grew at a 1.6% rate last quarter, held back by an
increase in the trade deficit. The wider trade gap reflected a surge
in imports, a function of strong domestic demand.
Households spent more on both goods and services last month. Goods
outlays vaulted 1.3%, with gasoline and other energy products as
well as food and beverages, recreational goods and vehicles, and
household equipment accounting for the jump.
Services spending rose 0.6%, lifted by healthcare, housing and
utilities as well as financial services and insurance.
When adjusted for inflation, consumer spending climbed 0.5%. The
so-called real consumer spending also increased 0.5% in February.
March's strong gain put consumer spending on a higher growth path
heading into the second quarter.
"Consumers appear to have solid momentum coming out of the first
quarter," said Daniel Silver, an economist at JPMorgan. "While we
don't have much hard data for the second quarter at this point, the
end-point for the first quarter suggests that second-quarter
spending growth could be strong."
Personal income increased 0.5% after a 0.3% gain in February,
boosted by a 0.7% rise in wages amid a tight labor market. But
higher inflation eroded some of the increase.
Disposable household income after accounting for inflation and taxes
rebounded 0.2% after slipping 0.1% in February. Consumers saved less
and also tapped into savings. The saving rate fell to a 16-month low
of 3.2% from 3.6% in February.
"The low saving rate is not a huge concern because we think it
mostly reflects the strong state of household balance sheets, with
debt-to-income ratios low, the cost of servicing debt still
extremely low, and household net worth rising rapidly amid elevated
house and equity prices," said Michael Pearce, deputy chief U.S.
economist at Oxford Economics.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul
Simao)
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