U.S. Core PCE Price Index Annual Growth Hit 3.3% in April, Reaching a Two-and-a-Half Year High

The Federal Reserve's most favored inflation reference indicator has just been released, with the overall PCE price index rising to 3.8% year-on-year, and the core PCE rising to 3.3% year-on-year, the highest level in two and a half years, further consolidating the expectation that the Federal Reserve will maintain interest rates unchanged in the short term.

Specifically, the core PCE price index rose by 0.2% month-on-month in April, lower than the market预期的 0.3% and the previous value of 0.3%; it rose 3.3% year-on-year, in line with expectations, slightly higher than the 3.2% in March. The overall PCE price index rose month-on-month by 0.4%, lower than the expected 0.5% and the previous value of 0.7% year-on-year; it rose 3.8% year-on-year, as expected, higher than the 3.5% in March.

Personal spending grew by 0.5% month-on-month, in line with expectations; personal income saw zero growth month-on-month, significantly below the market's expected 0.4%, and the previous value was also revised down from 0.6%. Due to zero growth in personal income and a 0.5% increase in consumer spending, the U.S. savings rate has fallen to the lowest since June 2022.

The Iran war is the core driver of this round of inflationary heating. Since the outbreak of the conflict at the end of February, the global energy market has been severely impacted, with oil prices remaining high and transmitting to a broader range of goods and services prices. It is worth noting that this is the fourth external shock in five years that has pushed inflation away from the Federal Reserve's 2% target - the previous ones being the COVID-19 pandemic, the Russia-Ukraine war, and Trump's tariffs. The Federal Reserve usually "ignores" supply-side shocks, considering them as temporary influences, but some officials have begun to question whether this approach still applies.

Governor Lisa Cook stated on Wednesday, "The risks still tilt towards higher inflation," and if inflation does not fall in time, she is "ready to raise interest rates." Governor Chris Waller also said last week that if inflation does not cool down soon, he "cannot rule out the possibility of further interest rate hikes in the future," especially in cases where there are signs of inflation expectations becoming detached. Boston Fed's Susan Collins, Dallas Fed's Lorie Logan, Minneapolis Fed's Neel Kashkari, and Cleveland Fed's Beth Hammack are looking to revise the policy statement wording with Waller to reflect both potential rate cuts and rate hikes in the next step. Federal Reserve Vice Chair Philip Jefferson is relatively moderate, expecting inflation to fall later this year as tariffs and energy shocks recede, but also acknowledging that upside risks cannot be ignored.

These inflation data may fuel the increasing calls from more Federal Reserve officials for the Federal Reserve to suggest that its next interest rate action may not be a rate cut. Kevin Warsh, who was sworn in on May 22nd as the new Chairman of the Federal Reserve under President Donald Trump, may need to persuade his new colleagues that there is no need to control inflation expectations through interest rate hikes.

In the meantime, spending data indicates that consumers are becoming more cautious against the backdrop of concerns about the cost of living and uneven hiring trends. The surge in fuel and other material prices caused by conflicts in the Middle East is creating a ripple effect in the economy and pushing consumer confidence to a record low.

On the market side, federal fund futures traders currently expect the Federal Reserve to start raising interest rates as early as the beginning of next year, with the 2-year U.S. Treasury yield remaining near 4% this week, 25 basis points higher than the upper limit of the Federal Reserve's target range.