The U.S. personal consumption expenditures price index climbed 3.8% in the 12 months through April, marking the steepest year-on-year increase since May 2023, the Commerce Department's Bureau of Economic Analysis reported on Thursday. The advance follows an unrevised 3.5% rise in March.
Measured month to month, the PCE price index rose 0.4% in April after a 0.7% jump in March. Economists polled by Reuters had forecast a 3.8% year-on-year increase in the PCE index.
Energy prices were the principal driver of the acceleration. Disruptions to shipping through the Strait of Hormuz connected to the war with Iran have pushed energy costs higher, a dynamic apparent in U.S. fuel markets. The national average retail gasoline price increased 12.3% in April, according to data from the U.S. Energy Information Administration, and gasoline prices have risen more than 50% since the conflict began at the end of February.
Beyond gasoline, the conflict also strained global supply chains and contributed to shortages across a range of goods cited in the government release, including fertilizers, aluminum and various consumer products. Those pressures, together with the rise in energy costs, have fed into higher prices for a broad set of household purchases.
Even excluding volatile food and energy components, inflation remained elevated. The so-called core PCE price index increased 3.3% year-on-year in April, up from 3.2% in March. On a monthly basis, core PCE rose 0.2% in April after a 0.3% gain the prior month. The Federal Reserve monitors the PCE measures in assessing progress toward its 2% inflation goal.
Financial market participants are pricing in a prolonged period of higher policy rates. Markets expect the Fed will maintain its benchmark overnight interest rate in the 3.50% to 3.75% range into 2027. Those expectations reflect, in part, minutes from the Federal Open Market Committee's April 28-29 meeting that showed a growing number of policymakers acknowledged the possibility they may need to raise rates further.
Consumer spending held up in April despite the jump in prices. Personal consumption expenditures rose 0.5% for the month following a 1.0% surge in March. Spending accounts for more than two-thirds of overall economic activity, so sustained outlays are central to near-term growth dynamics.
Household finances have been supported in recent months by large tax refunds that have bolstered spending capacity for many consumers, especially lower-income households. In addition, consumers have been drawing down savings accumulated during earlier phases of the economic cycle. Still, the report notes that inflation has been outpacing wage gains, and with the tax filing season concluded, households are likely to rein in consumption over time.
Economists cited in the release expect that at some stage consumers will prioritize rebuilding savings, particularly amid the heightened uncertainty stemming from the conflict in the Middle East. The combination of elevated inflation and eroding real incomes is likely to weigh on discretionary spending patterns over time, the report indicates.
Policy and political considerations were also highlighted. Inflation was already elevated before the conflict, with the government report pointing to prior increases in import duties as a contributing factor. Rising prices have political ramifications as well; public frustration over inflation has affected approval ratings and could influence electoral dynamics. A survey noted that the president's approval rating fell to near its lowest level since returning to the White House, driven in part by declining support among members of his own party. Observers warned that sustained high inflation could pose risks to the ruling party's prospects in upcoming congressional elections.
In sum, April's PCE data underscore the continuing role of energy and supply-chain disruptions in lifting headline inflation, while core inflation remains above the Federal Reserve's target. The persistence of these trends leaves monetary policy on a cautious footing, with markets anticipating that elevated interest-rate settings may be maintained for an extended period as policymakers weigh incoming data.
Summary
April's PCE report shows headline inflation at 3.8% year-on-year, driven primarily by a sharp rise in gasoline and other energy prices tied to the war affecting shipments through the Strait of Hormuz. Core inflation also rose modestly. Consumer spending stayed resilient in April, aided by tax refunds and savings, but the balance between spending and rebuilding savings is expected to shift as inflation outpaces wage gains.