The Federal Reserve’s favorite measure of inflation has dropped to its lowest point since last fall, bringing some relief to anxious markets. The Personal Consumption Expenditures (PCE) index rose by just 2.1% in April compared to a year earlier, down from 2.3% in March. This is the lowest inflation rate recorded since September, according to data from the Commerce Department.
When looking at core PCE prices, which exclude food and energy costs, the increase was 2.5% year-over-year. This is also a decrease from March’s 2.7% and marks the lowest level in over four years. Economists often focus on core prices as they provide a clearer picture of inflation trends.
The release of this data coincided with rising trade tensions between the U.S. and China. Earlier on the same day, President Trump accused China of breaching a tariff agreement, which has heightened concerns about the ongoing trade war and its effects on global markets.
Despite these tensions, traders are betting that the Federal Reserve will lower interest rates in September. On the day of the report, stock indexes showed slight declines, with the Dow Jones Industrial Average down 45 points, the S&P 500 falling by 17 points, and the Nasdaq Composite dropping by 103 points.
The recent figures indicate that inflation is continuing to decrease from its peak after the pandemic, which hit a 40-year high in July 2022. However, some economists and business leaders warn that prices may rise again due to the impact of tariffs. Recent court rulings have cast doubt on the timing and effectiveness of these tariffs, which were previously deemed unlawful.
In April, both overall prices and core prices saw a modest increase of 0.1% from March. Notably, prices for big-ticket manufactured goods increased by 0.5%, although this was offset by a 0.1% decline in other categories, like groceries. Services saw a slight rise of just 0.1%.
Consumer spending overall rose by 0.2% in April, a slowdown from March’s 0.7% increase. This cautious spending could reflect consumer worries about rising prices. Analysts suggest that the spending surge in March may have been a response to anticipated tariff increases.
Kathy Bostjancic, chief economist at Nationwide, noted that the rush to buy goods before tariffs could dampen household spending in the months ahead. She anticipates that inflation trends may reverse later in the year as companies start passing on higher costs to consumers to protect their profit margins.
Incomes, before adjusting for inflation, rose by 0.8% in April, largely due to an increase in Social Security benefits for certain retired workers. The Federal Reserve, at its recent meeting, acknowledged that inflation remains above its target of 2%. Officials are considering keeping interest rates steady while they assess the ongoing impact of tariffs on inflation and employment.
The future of tariffs remains uncertain, as the Trump administration continues to appeal recent court rulings against them. Officials have indicated they may seek other legal avenues to implement these tariffs, leaving businesses and consumers in a state of uncertainty about what to expect moving forward.