Spending report hints that Powell may be right about inflation

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An uptick in inflation may be a sign that Federal Reserve Chair Jerome Powell was right when he said a dip in prices could be brief, allowing patience on interest rates.

While core inflation is still trending below 1.5%, personal consumption expenditures rose 0.3% in April, and climbed to 1.5% from 1.4% on an annualized basis. Core PCE — which excludes food and energy and is the Fed’s preferred measure of inflation — rose 0.2% in the month and is up 1.6% on an annualized basis. Personal income grew 0.5% in the month.

The core increase was the largest since October 2017. This rise “will allow the Fed to maintain its emphasis on a ‘patient’ policy stance in the near term, but core inflation is still unlikely to reach 2% by year-end,” according to Berenberg Capital Markets U.S. Economist Roiana Reid. “Inflation persistently below 2% puts the Fed in an awkward spot because of its ‘symmetric’ 2% inflation target, but it is positive for consumption and the broader economy. These trends will be central in the Fed’s broader rethink of its monetary policy strategy this year.”

Although the personal saving rate has dropped 1.2 percentage points in six months, “it is still well above levels observed in the prior cycle, suggesting that consumers have room to boost spending,” Reid wrote in an analysis.

However, trade tensions escalated in the period after data were collected, and could have an effect going forward.

Low inflation and increasing trade issues are not yet enough for the Fed to cut interest rates, according to Federal Reserve Bank of Minneapolis President Neel Kashkari. “Either of those could be cause for changing the path of monetary policy,” Kashkari said in an interview on Bloomberg Television. “I’m not quite there yet. I take a lot of comfort from the fact that the job market continues to be strong.”

Chicago Purchasing Managers
The Chicago Business Barometer rose to 54.2 in May from 52.6 in April, but the three-month average fell to a two-year low, suggesting weakness in business activity.

Consumer Sentiment
The University of Michigan’s final May consumer sentiment index declined to 100.0 from the 102.4 preliminary reading. It is up from April’s 97.2.

The current conditions index decreased to 110.0 from 112.3 in April, and the expectations index rose to 93.5 from 87.4.

The report showed consumers expect higher inflation, as one-year expectations rose to 2.9% from a 2.5% rise seen in April, while the five-year rose to 2.6% from 2.3%.

Other indicators
Also released Friday, the Federal Reserve Bank of Chicago’s Midwest Economy Index indicated below-average growth, as it declined to negative 0.04 in April from positive 0.21 in March. The relative MEI slid to 0.18 from 0.64 in March.

The seasonally adjusted Milwaukee Report on Business index decreased to 47.83 in May from 55.04 in April, the Institute for Supply Management-Milwaukee reported. The number suggests a decline in activity.

The Federal Reserve Bank of New York’s Nowcast prediction for second quarter gross domestic product rose to 1.5% from 1.4% last week, as “positive surprises from prices data and data revisions accounted for most of the increase,” the Fed said.

The Federal Reserve Bank of Atlanta GDPNow forecast sees Q2 GDP at 1.2%, down from its prior estimate of 1.3%. Gains from personal consumption expenditures were “more than offset by a decline in the nowcast of second-quarter real nonresidential equipment investment growth,” the Fed said.

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Monetary policy Economic indicators Jerome Powell Neel Kashkari Federal Reserve FOMC Federal Reserve Bank of Minneapolis
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