Inflation rose 0.4% in April and 4.7% from a year ago, according to the Fed’s main gauge

Inflation remained stubbornly high in April, increasing the likelihood that rates will stay high longer, according to a gauge released Friday that closely tracks the Federal Reserve.

The personal consumption price index, which measures a variety of goods and services and adjusts for changes in consumer behavior, rose 0.4% for the month excluding food and energy costs, higher than the 0.3% Dow Jones estimate.

On a year-over-year basis, the gauge rose 4.7%, 0.1 percentage point higher than expected, the Commerce Department reported.

Including food and energy, total PCE also rose 0.4% and was 4.4% higher than a year ago, up from 4.2% in March.

Despite higher inflation, consumer spending held up well and personal income increased.

The report showed that spending rose 0.8% this month, while personal income rose 0.4%. Both numbers were expected to rise 0.4%.

Price increases were almost evenly distributed, with goods up 0.3% and services up 0.4%. Food prices fell by less than 0.1%, while energy prices rose by 0.7%. On an annual basis, goods prices rose by 2.1% and services by 5.5%, further indicating that the US was reverting to a service economy.

Food prices rose by 6.9% from a year ago, while energy prices fell by 6.3%. Both PCE gains were the highest since January.

Markets reacted little to the news, with stock market futures pointing higher as investors focused on improving prospects for a debt ceiling agreement in Washington. Government bond yields tended to be higher.

“With today’s warmer-than-expected PCE report, the Fed’s summer vacation may need to be cut as consumer vacations drive spending,” said George Mateyo, chief investment officer at Key Private Bank. “Prior to today’s release, we think the Fed may have been hoping to take the summer off (i.e. pause and reassess), but now it seems the Fed’s job of getting inflation down isn’t over. “

The report comes just weeks before the Fed’s June 13-14 policy meeting.

The Fed is aiming for annual inflation around 2%, which means current levels remain well above target and there is a good chance that the aggressive moves the central bank has made over the past year can remain intact.

One of the ways the Fed’s rate hikes are supposed to work is by reducing demand. However, April’s spending figures show that consumers have continued to spend despite both higher rates and strong inflation, meaning policymakers may have more to do.

Immediately after the report, market prices rose to a 57% chance that the Fed will hike another quarter of a percentage point at its June meeting. Before then, there are only two key data points, with the May nonfarm payrolls report coming out this Friday and the consumer price index on June 13.

Along with the rise in consumer spending, demand for durable goods also unexpectedly increased by 1.1% in April, according to a separate report from the Department of Commerce. Economists polled by Dow Jones had expected a fall of 0.8%. Excluding transportation, which rose 3.7%, new orders fell 0.2%.

Consumers had to save to keep up with their spending, with the personal savings rate of 4.1% representing a 0.4 percentage point decline from March.

The data comes amid a high degree of uncertainty about where the economy will go from here. Expectations for a recession later this year are high given rising interest rates, an expected credit crunch in the banking system and consumer pressure on several fronts.

However, a report released Thursday showed that the economy grew more than initially reported in the first quarter, with GDP growing at 1.3% year-on-year compared to the previous estimate of 1.1%.

Minutes released Wednesday from the Fed’s May meeting show policymakers are divided on their next move as members try to balance higher-than-expected inflation with spillover effects from banking sector problems.

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