US April PCE Up 3.8% Year-on-Year... Will the Fed Prolong the Rate Pause?

Headline Inflation at Highest Level in Nearly Three Years
Core Inflation Slows Compared to Previous Month
Consumption Remains Resilient Despite Stagnant Income
Savings Rate at 2.6% Signals 'Endurance Spending'

As international oil prices soared in the aftermath of the Iran war, the US Personal Consumption Expenditures (PCE) price index in April recorded its highest growth rate in nearly three years. Despite the deterioration in real purchasing power for American households, consumer spending remained resilient, raising concerns that inflationary pressures may not subside as easily as expected.

The US Department of Commerce announced on the 28th (local time) that the April PCE price index rose 3.8% year-on-year. This is the highest increase in 2 years and 11 months since May 2023 (4.0%). On a month-on-month basis, it rose by 0.4%.

April US PCE.

The core PCE price index, which excludes energy and food, increased by 3.3% compared to the same month last year. This is the highest level since October 2023. Month-on-month, it rose by 0.2%.

While headline inflation came under renewed upward pressure, the core inflation rate slowed compared to the previous month (0.3%), indicating that the sharp rise feared by the market did not materialize. However, it still remains well above the Fed's target of 2%.

What stands out is that US consumer spending continues to show resilience. In April, personal consumption expenditures increased by 0.5% month-on-month. However, the real consumption growth rate, excluding price increases, was only 0.1%. Compared to the nominal consumption increase (+0.5%), the actual pace of consumption expansion (+0.1%) was limited. In other words, much of the increase in consumption reflects the impact of rising prices.

On the other hand, personal income remained virtually unchanged. In April, personal income decreased by less than 0.1% month-on-month, while disposable personal income (DPI), which excludes taxes, decreased by 0.1%. Real disposable income, adjusted for inflation, declined by 0.5%.

Nevertheless, consumption was sustained because American households maintained their spending by reducing savings. The personal savings rate in April stood at a low 2.6%. This suggests that US consumption is relying more on reduced savings than on improvements in real purchasing power.

Several retailers, including Walmart, warned that their earnings are under pressure due to high oil prices and that this could soon be reflected in in-store product prices. Bloomberg pointed out that, although increased tax refunds in recent months have supported consumer spending, this effect has been partially offset as gas station prices have risen to their highest levels in nearly four years.

The market expects that this data will reinforce the Federal Reserve's cautious stance. Recently, several comments from within the Fed have emphasized the risk of a resurgence in inflation over concerns about a slowdown in the labor market. Fed Governor Lisa Cook warned at a Stanford University event the previous day that "the risks to inflation are tilted to the upside" and even hinted at the possibility of additional tightening if necessary.

However, some believe that, given the relatively stable trend in the core PCE inflation rate, the likelihood of the Fed immediately resorting to a rate hike is limited. Instead, as the pace of inflation moderation is slower than expected, the prevailing view is that the 'higher for longer' approach of keeping interest rates elevated for an extended period may become even more entrenched.

This content was produced with the assistance of AI translation services.