• Topline Consumer Price Index (CPI) rose by 0.4% in April 2023, up 5.0% year-over-year
• Core CPI, less Food & Energy, held its troublingly strong pace at 0.4% in April 2023, 5.5% year-over-year
• Shelter and Food & Beverage price growth remained tame in April 2023, rising 0.2% and 0.1%, respectively
• Recreation prices bounced in April 2023 to 0.5% (5.0% year-over-year) perhaps indicating continued consumer bullishness

Consumer Price Index (CPI) inflation was relatively unchanged, and above many expectations, in April 2023 for both the topline and core measures. Year-over-year inflation for All Consumer Items was 5.0% in April, matching March’s result. Year over year, non-seasonally adjusted inflation came in at 4.9% for April 2023. Core prices grew at a 0.4% pace for the month, which translates to a 5.0% annualized pace. Optimistic forecasts had hoped for an April Core result of 0.3%, which would have driven the annualized pace to under 4.0%. Transportation prices played a large part in April’s unyielding inflation results, as did gasoline and recreation prices. Core components, “necessities” or not, price growth in these categories point to where consumers are spending money and suggest that the Federal Reserve’s fight against inflation remains well-founded.

At +0.4% for March 2023 versus the month prior, Core CPI – which excludes volatile Food and Energy prices, and which the Federal Reserve eyes most closely when setting monetary policy – has plateaued at a 5.0% annualized rate (~0.4% month-over-month). The year-over-year result given this pace has translated to 5.5% in the headlines, but that calculation includes all price volatility that was incurred throughout 2022.

The fact that Core inflation’s annualized pace remains well above the Federal Reserve’s target of 2% and shows no signs of trending downward is critical. Decreases on this front will be necessary before the Fed’s monetary policy rhetoric can be expected to change. PNC is not forecasting any further interest rate hikes out of the Fed in 2023, but tough talk will remain in play from policymakers. Those efforts alongside banks’ tightening lending standards could be enough to finally bring an end to inflation into sight. Unfortunately, consumer and business activity will also slow in response and PNC’s forecast of a recession beginning in late 2023 still seems likely. 

In the category of good news out of the April 2023 CPI report, price growth for Food & Beverages remained subdued, posting a 0.1% gain and up only 0.6% at an annualized pace. Food & Beverages prices are still up 7.5% versus one year ago, but this compares to gains of more than 10% year-over-year throughout the second half of 2022 when most of the damage in this category accumulated. Also encouraging in the Food & Beverages inflation numbers is that the Food at Home subcategory was down modestly for the second consecutive month (-0.2%). This compares to price growth for Food Away from Home which still up relatively strongly at +0.4% for April 2023 (+4.5% annualized). Indeed, prices in the overall Recreation component of CPI jumped to +0.5% for the month, indicating that consumer demand in discretionary categories continues to drive the inflation narrative.

Price declines for Food at Home give household budgets an option to avoid inflation by cutting out at least one discretionary spending indulgence from their routines. But as with any consumer cutbacks in spending, less restaurant dining would also have the impact of slowing broader economic activity and contributing to what PNC is still forecasting as a likely recession beginning by year’s end.

The annualized pace of CPI inflation is now below wage growth. Average wage gains, as published by the Bureau of Labor Statistics were up by 5.9% for April 2023, which compares to the annualized 4.5% and 5.0% inflation results for the month.

Labor markets are still undeniably tight, and consumer spending may well be encouraged given that perception of strength especially as warmer weather defines the next few months. While wage growth is healthy and job creation is robust, consumers seem destined to continue to spend, especially on the services side of the economy. Travel and even local leisure spending will keep demand-side inflationary pressures from abating quickly, leaving little room for the Fed to consider rate cuts this year.

Dwindling savings among households and rising high-interest consumer debt are still concerns as to how households will pay for their spending habits in the coming months in the face of still-strong inflation trends. These influences combined make a recession in the second half of this year the most likely outcome as the U.S. consumer breaches its spending limits.

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.