Key measure of inflation rises as Federal Reserve considers interest rate pause

IMF says higher interest rates will be needed to drive down US inflation

Vegetable shopping at a supermarket in Washington. Reuters

A key inflation metric closely watched by the Federal Reserve rose above expectations in April, putting further pressure on the US central bank as it considers pausing interest rates next month.

The Personal Consumption Expenditures Price index rose by 0.4 per cent last month, beating the Dow Jones's 0.3 per cent estimate, data released by the US Commerce Department showed.

Prices increased by 4.4 per cent on an annual basis.

Real PCE, which excludes food and energy, increased by 4.7 per cent on an annual basis.

Friday's report from the Commerce Department comes as policymakers at the Fed consider how to tackle interest rates. The central bank has raised rates 10 consecutive times since March 2022 to the range of 5 and 5.25 per cent.

Minutes released from the Fed's May 2-3 meeting showed that policymakers “generally agreed” that continuing interest rate increases “had become less certain”.

Consumer spending increased by 0.8 per cent last month. While buoyed by a strong labour market, consumer spending has slowed in recent months, showing that the Fed's interest rates and stress in the banking sector have had some effect on slowing the economy.

Revised gross domestic product figures showed that the US economy had grown by a tepid 1.1 per cent in the first quarter. Analysts from Moody's expect the US will enter a mild recession later this year.

In raising its interest rates, the Fed has sought to bring inflation back down to 2 per cent, but Friday's report shows that it remains above the target.

Traders expect the Fed will announce another 25 basis point increase when it meets next month, data from the CME Group shows.

IMF slightly raises forecast for US economic growth

Real GDP growth in the US is expected to increase by 1.7 per cent this year, slightly up from the International Monetary Fund's previous 1.6 per cent projection, the global institution said in a statement.

Inflation will continue to bog down the world's largest economy into next year, however.

“While core and headline PCE inflation are expected to continue falling during 2023, they will remain materially above the Fed’s 2 per cent target throughout 2023 and 2024,” the IMF said in a statement.

The IMF projected that interest rates would need to remain high for US inflation to decline.

The organisation forecasted interest rates to hit between 5.25 per cent and 5.5 per cent by the end of 2023 and called on the Fed to “communicate carefully” how it assesses incoming economic data.