US inflation shows little progress as next Fed decision looms

Federal Reserve faces a delay in cutting interest rates as other central banks prepare to ease restrictive policies

The Federal Reserve is expected to hold rates steady when it meets in June. Reuters

US inflation showed little sign of progress last month, with the Federal Reserve expected to keep interest rates elevated when it next meets.

The Personal Consumption Expenditures (PCE) price index rose by 0.3 per cent in April, unchanged from March, the Commerce Department reported.

Headline and core inflation also remained flat on an annual basis at 2.7 per cent and 2.8 per cent, respectively.

The Fed closely follows the PCE when determining its monetary policy decisions.

Friday's report was not expected to have a significant impact on the US central bank's June 12 decision, when it is expected keep rates steady between 5.25 per cent and 5.5 per cent.

The UAE and Saudi Arabia, whose currencies are pegged to the US dollar, are also expected to hold rates at their current level.

Hot inflation data and strong economic activity have delayed the Fed's rate cuts, with investors now pencilling in a quarter of a percentage point rate cut in November.

“The weaker tone of both the spending and PCE inflation data in April are the first of a series of softer reports needed for the Fed to begin cutting interest rates later this year,” said Michael Pearce, deputy chief US economist at Oxford Economics.

That delay puts the Fed behind other central banks. Both the European Central Bank and the Bank of Canada are expected to cut interest rates next week, and the Bank of England could also begin cutting rates in June.

The Fed's delay will also force central banks in the Asia-Pacific region to slow their rate reductions and the process of monetary policy normalisation in most emerging markets, S&P projected in its global economic update last week.

The PCE report is the last major inflation metric the Fed receives before its “blackout period”, the roughly 10-day window when Fed officials are prohibited from publicly speaking before the two-day monetary policy meeting.

In his last public remarks before the quiet period, New York Federal Reserve Bank President John Williams on Thursday said he felt the current policy level was “restrictive enough” to get inflation down to 2 per cent and that officials had to consider future risks and uncertainties.

“Not only in the US but, quite honestly, the other advanced economies. They have seen the disinflation happen with relatively small, low degrees of economic disruption,” he said at the Economic Club of New York.

Mr Williams, a voting member of the policy-setting Federal Open Market Committee, also ruled out potential rate increases and said he believed inflation would climb down later this year.

“I think at some point, interest rates in the US will … eventually need to come down, but the timing will be driven by how we're doing on achieving our goals and how do we best balance the various risks,” he said.

Along with its rate decision on June 12, the Fed is also scheduled to release its updated economic forecasts. Its March forecast estimated three rate cuts this year, with PCE inflation dropping to 2.4 per cent.