The Fed's Favorite Inflation Measure Surged in April, Raising Rate Hike Odds

The Federal Reserve’s preferred measure of consumer prices surged in April, dealing a setback in the fight against inflation.

Prices as measured by Personal Consumption Expenditures rose 4.4% from April 2022, up from a 4.2% annual increase in March, data from the Bureau of Economic Analysis showed Friday. That overshot the expectations of economists, who on average had projected it to rise only to 4.3%. Not only that, but core inflation, which excludes prices for food and energy, ticked up to 4.7% year-over-year, matching its highest since November.

Higher prices didn’t stop shoppers from ramping up spending in nearly every major category, as inflation-adjusted consumer spending rose 0.5% in April over March, the biggest jump in spending since January.

The report of stubbornly high inflation and brisk spending make it more likely that the Federal Reserve will raise its benchmark interest rate for an 11th time in a row when it next meets in June. Bond trading data from the CME Group’s FedWatch tool showed the odds of another rate hike rose to nearly 60% from 51.7% the day before. 

“American consumers were out in force in early spring and inflation perked up as well...not what the Fed wants to hear,”  Sal Guatieri, senior economist at BMO Capital Markets, wrote in a commentary. 

The Fed’s campaign of interest rate hikes since March 2022 is meant to subdue inflation by discouraging borrowing and spending and allowing supply and demand to rebalance. The Fed also hopes to cool the red hot labor market to prevent an out-of-control wage-price spiral from taking hold.

In recent weeks, Fed officials have been divided between “hawks” who want to raise interest rates more to ensure inflation is quelled, and “doves” who want to pause the rate hikes so that they don’t slow growth so much it causes a recession, especially with other factors, such as the debt ceiling standoff and a banking crisis, putting stress on the economy. Friday’s report gives ammunition to the hawks.

“The U.S. economy continues to confound the doubters, with strong spending keeping inflation far too high,” James Knightley, chief international economist at ING, said in a commentary. “The Fed hawks will increasingly move into the ascendancy, and if the debt ceiling drama is resolved favorably and next Friday's jobs numbers are hot, we have to accept a June interest rate hike would look more likely than not.”

Correction—May 26, 2023: A previous version of this article misidentified the inflation-adjusted increase in consumer spending in April. It's 0.5%.