A favorable view on income and inflation.
The April report on personal income and personal consumption expenditures (PCE) showed strong income gains (up by 0.8 percent, well above expectations), but some slowing in consumer spending (up by 0.2 percent, as expected). The key inflation figures were unambiguously very positive, with the overall price index for PCE and the core PCE (removing the volatile food and energy components) both up by only 0.1 percent for April – slow gains but up a tad from the prior month’s unchanged readings. The 12-month trend rates, however, slipped a bit to 2.1 percent for the overall PCE and 2.5 percent for the core. While these are both still slightly above the Fed’s 2.0 percent long-term goal, they are closer.
This was certainly good news, especially for inflation, for April – but these data are mostly pre-tariff. Even for those items for which tariffs were imposed in April, inventories of goods were mostly sold at pre-tariff prices. It is likely that this will be the low point for inflation for a while as tariffs on more goods and services begin to impact prices. The impact will probably be small to begin, as inventories of pre-tariff goods will be run off and many proposed tariff increases have been postponed, but if the Administration is allowed to impose tariffs by the courts (still uncertain at this time), prices will go up in coming months.
The Federal Reserve will certainly be pleased with today’s figures, as it shows slowing inflation and a still growing economy (and solid income gains). But it will wait to make any policy changes until the impact of tariffs is clearer – suggesting that the Fed will keep policy unchanged for a while.
David W. Berson, Ph.D., CBE
Chief Economist
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