An acceleration in inflation in April complicates the outlook for the Federal Open Market Committee meeting in mid-June. Both the overall and core (excluding food and energy) personal consumption expenditure price indices, the Fed’s preferred inflation measures, increased 0.4% in April from March. This was up from monthly 0.1% overall inflation, and 0.3% core inflation, in March.

More importantly, both inflation measures accelerated on a year-over-year basis in April. Overall inflation was 4.4%, up from 4.2% in March, and core inflation was 4.7%, up from 4.6% in March. Core inflation has been stuck at 4.6% to 4.7% since December, far above the FOMC’s 2% objective, although down from a cyclical peak of 5.4% in February 2022.

Stubbornly high inflation, particularly core inflation, may lead the FOMC to raise the federal funds rate again at their meeting on June 13 and 14. The minutes from the FOMC’s previous meeting, in early May, suggested that the committee could keep the fed funds rate in its current range of 5.00% to 5.25% in June. The fed funds futures market is currently pricing in a 53% probability of a 25-basis point rate increase in June, up from 17% a week ago. But PNC’s forecast is for no fed funds rate increase in June, or in the rest of 2023. The FOMC’s decision in June will depend on what happens with the debt limit, the April employment report (released June 2), and the May CPI report (released June 13). 

With the big increase in interest rates since early 2022, PNC expects a mild recession to start later this year. This will slow inflation and cause a deterioration in the labor market, leading to fed funds rate cuts starting in early 2024, supporting an economic recovery next year.

Nominal personal income was up 0.4% in April from March, with labor market compensation up 0.5%. Nominal after-tax income rose 0.4% in April.

Real (inflation-adjusted) personal income was flat in April from March, as was real after-tax income. Real after-tax income increased 0.2% in both March (revised lower from 0.3%) and February (unrevised).

Nominal consumer spending jumped 0.8% in April, with real purchases up 0.5%. There was an especially large increase in purchases of durable goods (up 1.4% real), including autos (up 2.2% real), as supply chain problems continue to fade. There were more modest increases in spending on nondurable goods (up 0.4% real) and services (up 0.3% real). Real consumer spending was flat in March and down slightly in February.

With a big increase in spending and a smaller increase in income, the personal saving rate fell to 4.1% in April from 4.5% in March. But the saving rate has been 4% or higher every month in 2023 after being below 4% through most of 2022; slowing inflation has helped households save more.

The outlook for consumer spending is softening. The job market is still strong, although job gains and wage growth are slowing. But high inflation, high-interest rates, a weakening housing market, and growing recession concerns are weighing on households. A further slowing in job growth through the rest of this year, with job losses toward the end of 2023 as the U.S. economy enters into recession, will lead to real declines in consumer spending in late 2023 and early 2024. But the downturn should be short and mild, thanks to strong household balance sheets and limited job losses as firms continue to struggle with the tight labor market.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.