Key inflation gauge worsens as Americans' income and spending power erodes

The U.S. Commerce Department announced Thursday that inflation rose to 3.8% in April compared to a year ago, the highest rate since May 2023, up from 3.5% in March. Monthly price increases slowed to 0.4% from 0.7% in March but remain above the Federal Reserve’s 2% target, suggesting no interest rate cuts this year. Rising costs for groceries, clothing, and electricity indicate inflation may be becoming entrenched, with core inflation (excluding food and energy) hitting 3.3%, the highest since October 2023. Americans’ after-tax, inflation-adjusted incomes dropped for the third consecutive month, while spending adjusted for inflation grew by just 0.1% in April, down from 0.3% in March. Economists warn of growing financial stress among households, with disposable income and spending weakening as inflation approaches a peak amid supply chain disruptions. The Federal Reserve’s stance is under scrutiny, as officials like new Chair Kevin Warsh may consider a rate hike instead of cuts. Treasury Secretary Scott Bessent repeated the claim that higher prices are ‘transitory,’ echoing a term from the 2021-22 inflation surge that fueled political opposition. Separate data showed the U.S. economy grew at a 1.6% annual rate in the first quarter, down from an initial estimate of 2%, reflecting the impact of the 43-day federal government shutdown and the Iran war. Consumer spending, driven by upper-income households, remains resilient but shows signs of slowing. Analysts note persistent inflation pressures, with Dan North of Allianz Trade warning of continued upward pressure on prices. Joe Brusuelas of RSM highlighted weakening household spending, signaling potential economic challenges ahead.