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Fed's Preferred Core-Price Gauge Picks Up as Spending Gains

The Fed’s preferred core price gauge -- tied to spending and excluding food and energy picked up for the 1st time this year.

Fed's Preferred Core-Price Gauge Picks Up as Spending Gains
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

(Bloomberg) -- A crucial measure of U.S. inflation watched by the Federal Reserve picked up in April for the first time this year while Americans’ spending and incomes topped forecasts, offering some evidence that economic growth is both holding up and helping boost prices.

The Fed’s preferred core price gauge -- tied to spending and excluding food and energy -- rose 0.2% from the prior month and 1.6% from a year earlier following a downwardly revised 1.5% in March, according to a Commerce Department report Friday. That matched the median estimates in a Bloomberg survey.

Fed's Preferred Core-Price Gauge Picks Up as Spending Gains

Meanwhile purchases, which make up more than two-thirds of the economy, climbed 0.3% after an upwardly revised 1.1% in March that was the best gain since 2009. Personal income increased 0.5% in April, the most this year, boding well for spending in the months ahead.

The rise in core inflation toward the Fed’s 2% target may help support Chairman Jerome Powell’s view that transitory factors had temporarily restrained the gauge while bond markets bet that price gains will stay muted. In addition, steady spending underscores the strength of the consumer in a solid labor market, with the Fed stressing patience on interest-rate moves amid economic weakness abroad and intensifying trade tensions.

Still, the data precede President Donald Trump’s escalating tariff war with China and threat late Thursday for levies on all goods from Mexico which together are scrambling the economic picture. If spending gathers momentum, economic growth could slow this quarter by less than previously thought following a 3.1% pace of first-quarter expansion that reflected significant boosts from trade and inventories.

“Everything we see today is good news for the economy, and at the margin a little better growth in the second quarter perhaps. I think the Fed is very firmly entrenched in its patient stance,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. In addition, “some of those temporary factors are starting to reverse on inflation.”

What Our Economists Say

“April’s personal spending data shows that American consumers will bail out growth from what is otherwise likely to be a tepid quarter. ... A modest rebound in core inflation could indicate that the Fed’s assessment of inflation weakness as ‘temporary’ might be starting to materialize.”
-- Yelena Shulyatyeva and Carl Riccadonna, economists
Click here for the full note.

Federal Reserve Vice Chair Richard Clarida said earlier Thursday that the central bank’s current policy stance was appropriate, reiterating that softness in recent inflation data was likely temporary. At the same time, he said that if downside risks mounted, policy makers could consider easing monetary policy.

Inflation-adjusted spending was little changed from the prior month following a 0.9% increase. The April figures reflected lower spending on services, particularly household electricity and gas, while spending on gasoline and other energy goods contributed to the increase in merchandise consumption.

The broader price gauge for personal consumption expenditures, which is officially the basis for the Fed’s 2% inflation target, rose 0.3% from the prior month and 1.5% from a year earlier, matching the monthly median estimate of economists but just below the annual projection.

With the main PCE indexes running below 2%, Powell has drawn attention to an alternative measure, the Dallas Fed’s trimmed-mean PCE, which has come in more consistently around 2% in recent months and was at 2% in the April reading released Friday. That gauge strips out a certain proportion of items whose prices have risen or fallen the most in that month.

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  • Other median forecasts in the Bloomberg survey had called for April spending to increase 0.2%, with incomes estimated to be up 0.3%.
  • Wages and salaries climbed 0.3% from the prior month following 0.4% in March.
  • The personal saving rate rose to 6.2% from 6.1% the prior month.
  • Adjusted for inflation, disposable income rose 0.1% following a 0.2% decline.

--With assistance from Chris Middleton.

To contact the reporter on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Alister Bull

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