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Federal Reserve PCE Inflation Gauge Surges to Highest Since 1992

Trillions in government stimulus and supply-chain backlogs lifted the Federal Reserve's preferred inflation gauge to its highest level since 1992 last month.

The Federal Reserve's preferred measure of U.S. inflation surged the most in nearly three decades Thursday as consumer spending got a boost from President Joe Biden's $1.9 trillion American Rescue Plan and supply-chain bottlenecks added to price increases  

The core April PCE Price Index rose 3.1% from last year, the highest since 1992 and 0.7% on the month, the Bureau of Economic Analysis reported, topping Wall Street forecasts and adding to investors concerns about the sticky nature of consumer prices. 

The headline PCE index was up 0.6% on the month and 3.6% on the year, the highest in 13 years. Personal income actually decreased by $3.21 trillion, or 13.1%, while personal consumption expenditures rose 0.5% to $80.3 billion, the BEA noted, following the 4.7% surge recorded in March.  

In recent weeks, we had seen some softening in inflation expectations from subdued actions in markets such as agricultural commodities and housing. However, the strong print of the core PCE index for April will keep the inflation chatter alive and kicking for longer," said Anu Gaggar, senior global investment analyst for Commonwealth Financial Network

"Rise in prices of some of the underlying components like travel services, used motor vehicles, etc. could be transitory and reflective of pent-up demand, but there are others such as medical care services where the rebound might be more structural and worth keeping an eye on," Gaggar added. "Labor market data, primarily wage growth data will be key to determine Fed’s next course of action."

Stocks were largely unaffected by the release with the Dow Jones Industrial Average rising 115 point at the opening bell gain and the S&P 500 gaining 12 point advance. 

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April retail sales growth was unchanged from last month at a collective $619.1 billion, the Commerce Department reported earlier this month, well shy of the Street consensus forecast of a 1% gain, as the impact of government stimulus faded, a condition echoed by the BEA in Friday's release.

Inflation pressures, while building in the real economy, have thus far failed to alter market direction, with benchmark 10-year Treasury note yields easing to 1.596%. 

The so-called breakeven rate between five-year Treasury bonds and five-year inflation protected securities, a key market gauge for consumer price increases, has also eased to 2.2% this week, retreating from the 2006 high of 2.712% it reached earlier this month.

Wage pressures are beginning to mount, however, in the labor market, with JOLTS job openings data indicating 8.1 million open positions, the highest on record, while last week's April non-farm payrolls reported showed average hourly earnings rise 0.7% on the month -- against a forecast of -0.1% -- and 0.3% on the year. 

Headline CPI, calculated by the Bureau of Labor Statistics, accelerated 4.2% in April, the fastest pace since 2009, while the stripped-down core reading of 3% was the highest since 1981 as energy and used car gains boosted the headline reading amid an ongoing debate over the nature of price increases.

However, the weighting of used cars in the CPI data far outpaces their influence in the PCE index, according to Ian Shepherdson of Pantheon Macroeconomics,