April personal income, spending and inflation all saw renewed strength following several months of softening. Personal consumption expenditures spiked and income gains reaccelerated. Meanwhile, inflation metrics came in hotter following several months of cooling. Headline PCE price inflation rose to 4.4 percent from a year earlier and Core PCE price inflation rose to 4.7 percent from a year ago.

Collectively, this report shows that key parts of the US economy are resisting the unpredicted tightening in monetary policy that has occurred over the past year. The Fed Funds rate has risen by 500 basis points since March 2022, the most rapid increase in decades. Consumer spending has held up better than expected despite interest rate increases largely due to tightness in the labor market and wages gains. While the rate of inflation has been cooling generally, it remains far too high. The Fed has warned that the path to its two-percent inflation target will be bumpy, which is consistent with this April data print. We expect the Fed to raise rates by 25 basis points in June (absent challenges from a debt ceiling crisis) and then pause for the remainder of 2023. We forecast that these high rates will gradually push the US economy into the short and shallow recession this year.

Inflation

Headline PCE price inflation rose from 4.2 to 4.4 percent year-over-year (y/y) in April and core PCE price inflation (which excludes food and energy) rose from 4.6 to 4.7 percent y/y. On a month-over-month basis (m/m), headline PCE inflation rose from 0.1 percent to 0.4 percent while core PCE inflation rose from 0.3 percent to 0.4 percent. Prices for both goods and services rose for the quarter.

 Incomes

Overall personal income rose 0.4 percent m/m (in nominal terms) in April, vs. 0.3 percent m/m in March. However, when factoring in inflation the real month-over-month growth rate was flat from March. Meanwhile the savings rates fell from 4.5 percent to 4.1 percent of disposable personal income.

Spending

Personal consumption expenditure jumped by 0.8 percent m/m (in nominal terms) in April, vs. 0.1 percent m/m percent in March. Spending on services rose by 0.7 percent m/m while spending on goods rose to 1.1 percent m/m. However, after accounting for inflation, real consumer spending was 0.5 percent m/m in April with spending on goods rising to 0.8 percent m/m and spending of services rising to 0.3 percent m/m.