The Federal Reserve’s favored inflation metric, the personal consumption expenditures (PCE) price index, is rapidly approaching the 4% mark, a development attributed to a war-driven surge in energy costs. This trend is fueling unease that inflationary pressures may broaden across the economy.
Inflationary Pressures Mount
Government data expected on Thursday is projected to show the PCE price index jumped 3.8% in April compared to a year ago. This would represent a full percentage point increase from February, marking the most substantial two-month acceleration in inflation since late 2021. The situation is further complicated by the fact that even the core price measure, which excludes volatile food and energy components, is likely to have picked up in April to its fastest pace since late last year.
The conflict in Iran has sent ripples through the global economy, leading to a sharp increase in prices for fuel and other essential materials. This has had a tangible impact on consumer sentiment in the United States, which has reportedly tumbled to a record low. Businesses worldwide are also voicing concerns about rising costs, and inflation expectations are on the rise, contributing to climbing bond yields.
Fed Officials on Watch
In the coming week, several Federal Reserve officials are scheduled to deliver remarks. These include John Williams, Philip Jefferson, Neel Kashkari, and Alberto Musalem. Investors will be closely scrutinizing their comments for any indication of concern regarding the longer-term inflation outlook, particularly in light of persistent supply constraints stemming from the ongoing conflict in the Middle East. Notably, on Friday, Fed Governor Christopher Waller indicated his support for communicating that the central bank’s next move on interest rates is equally likely to be an increase as it is a decrease.
Economic Data on the Horizon
Beyond the PCE price data, the Bureau of Economic Analysis report will also provide figures on personal spending and incomes. These will offer an initial glimpse into household demand trends at the beginning of the second quarter. Economists are anticipating a modest rise in inflation-adjusted spending and a deceleration in the nominal growth of personal income.
Gasoline prices, currently near their highest levels since 2022, are exacerbating Americans’ worries about the cost of living. The impact of inflation on household budgets poses a significant risk to the outlook for consumer spending. Analysts at Bloomberg Economics noted, “If confidence weakens further, it would reinforce the risk that spending momentum softens into summer. The latest earnings for companies in the consumer-discretionary sector, such as Target, indicate that tax refunds have supported spending so far. If the Strait of Hormuz remains closed, sustained higher gas prices will erode the tax-refund cushion.”
In addition to the PCE data, a revised first-quarter gross domestic product report, which will include personal outlays for the period, is due on Thursday. The week, which is shortened by a holiday, also includes the release of the Conference Board’s May consumer confidence index on Tuesday. April durable goods orders and new-home sales are scheduled for Thursday, with figures on April merchandise trade to be released at the week’s end.
