A key U.S. inflation indicator rose by 3.1% YoY

According to the Commerce Department, a key inflation indicator increased a faster-than-anticipated 3.1% in April as price pressures built in the rapidly expanding U.S. economy.

The core personal consumption expenditures index was anticipated to rise 2.9% after increasing 1.9% in March. Fed officials believe the measure to be the best gauge for inflation, though they watch several metrics.

As part of its price stability mandate, the Fed estimates 2% to be healthy. However, it is committed to letting the level average higher than usual to promote full employment.

The index captures price movements across various goods and services. Notably, it is considered a wider-ranging measure for inflation as it captures changes in consumer behavior and has a broader scope than the Labor Department’s consumer price index. The CPI boosted by 4.2% in April.

Over the past month, core PCE increased 0.7 %, also faster than the anticipated 0.6%.

Including volatile food and energy prices, the headline PCE index surged 3.6% year over year and 0.6% from March.

According to Jefferies economist Aneta Markowska, inflation pressures might get worse before they get better. She remarked that failing retail inventories could push prices higher. Markowska added that a transition in consumer spending from goods to services ultimately should pull inflation pressures lower.

Most Fed officials remain hesitant to change policy

The Chicago manufacturing reading boosted more than expected, hitting 75.2, its highest level since November 1973. Also, the University of Michigan consumer confidence reading for May sank to 82.9.

Despite the $3.2 trillion decline in personal income, the savings rate remained raised at 14.9%. Meanwhile, consumer spending increased by 0.5%.

Personal income had risen 20.9% in March following the latest round of government stimulus checks.

Despite the consistent pace of inflation rises, most Fed officials remain hesitant to change policy.

The central bank is buying at least $120 billion of bonds each month and has kept benchmark short-term borrowing rates anchored close to zero even with the growing economy.

There have been some signs recently that the Fed is at least willing to start talking about reducing the pace of asset purchases. However, any real action is likely months away. Central bankers see the ongoing price pressures as short-lived due to supply chain bottlenecks and comparisons to last year when the economy was stopped.