[IMG alt="The PCE inflation April 2026 Federal Reserve data shows prices rising to 3.8% annually as the Iran war pushes oil costs higher and savings rates fall.
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The Federal Reserve’s preferred measure of inflation climbed to its highest level in three years in April, intensifying concern at the central bank and on Wall Street about price pressures that are broadening beyond energy and showing no clear signs of peaking.
The Personal Consumption Expenditures index rose 3.8% on an annual basis in April, up from 3.5% in March and in line with economist expectations.
The core measure, which strips out volatile food and energy prices and is closely watched as a predictor of longer-run inflation trends, rose 3.3% annually, up from 3.2% in March. That core reading is the highest in two and a half years.
Economists are warning that the worst may still be ahead.
RSM chief economist Joe Brusuelas said the pricing dynamics seen in May suggest that neither headline nor core inflation has yet reached its peak.
He added that the move higher in core inflation, which has historically been the best guide to where prices are heading over time, will be difficult to reverse in the near term and even harder to bring back toward the Fed’s 2% target.
New York Federal Reserve president John Williams said Thursday that he expects inflation to remain elevated in the coming months, with headline PCE closing in on 4% and core inflation staying above 3%.
He suggested the pace of increases could peak within a couple of months but made clear that policy needs to remain prepared to respond.
Goldman Sachs COO John Waldron said at a financial conference in New York that inflation is the single biggest risk in the current environment.
“Inflation, I would say, is probably the single biggest risk element. It’s the one that worries me the most personally,” Waldron said.
For most of the past year, the Federal Reserve had been debating how quickly to cut interest rates. That debate has now shifted in a more concerning direction.
Most Fed officials currently favor holding rates steady, but a growing number are no longer ruling out the possibility of a rate increase if inflation proves persistent.
Fed governor Lisa Cook said in a speech this week that she is closely watching the risk that businesses embed higher energy costs into their pricing while workers push them into wage negotiations, creating a self-reinforcing inflation cycle.
Cook said she is “prepared to raise rates” if inflation does not fall in a timely manner.
Fed governor Chris Waller, who had previously been one of the more dovish members of the committee and had supported rate cuts, said inflation is now his primary concern over the labor market.
He is among at least five Fed officials who want to revise the central bank’s policy language to reflect that the next move could be either a cut or a hike, rather than signaling cuts only.
Fed Vice Chair Philip Jefferson said he expects inflation to ease later in the year as tariff effects and the energy shock from the war subside, but he acknowledged risks are tilted to the upside and he is watching closely for signs that high energy prices begin to suppress consumer spending.
The inflation data arrived alongside a troubling signal from the Commerce Department about the state of household finances.
The personal savings rate dropped to 2.6% in April from 3.2% in March, indicating that Americans are spending more than their incomes alone can support and drawing down accumulated savings to cover the gap.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said rising prices are directly cutting into consumption and that the declining savings rate shows consumers are dipping into savings to make ends meet.
That dynamic is unsustainable over an extended period. If it continues, the drag on consumer spending that analysts have been anticipating could arrive more suddenly and more sharply than the gradual slowdown currently reflected in economic forecasts.
The 2-year Treasury yield, which tracks market expectations for the Federal Reserve’s benchmark interest rate, is currently sitting around 4%, approximately 25 basis points above the upper end of the Fed’s target range of 3.5% to 3.75%.
That premium signals that bond investors are pricing in not just a prolonged pause in rate cuts but the possibility of an outright hike before the end of the year.
The situation puts incoming Fed Chair Kevin Warsh in an immediate and uncomfortable position.
Nominated by a president who has repeatedly called for lower borrowing costs, Warsh will take the helm of the central bank at a moment when the inflation data is pointing in the opposite direction.
Brusuelas summed up the challenge bluntly: if the Iran war is not resolved soon, the Federal Reserve will find it increasingly difficult to look past the inflation being driven by the energy supply shock that began when hostilities erupted three months ago.
The post Fed’s Preferred Inflation Gauge Surges to Three-Year High as Iran War Keeps Prices Rising appeared first on .
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The Federal Reserve’s preferred measure of inflation climbed to its highest level in three years in April, intensifying concern at the central bank and on Wall Street about price pressures that are broadening beyond energy and showing no clear signs of peaking.
The Personal Consumption Expenditures index rose 3.8% on an annual basis in April, up from 3.5% in March and in line with economist expectations.
The core measure, which strips out volatile food and energy prices and is closely watched as a predictor of longer-run inflation trends, rose 3.3% annually, up from 3.2% in March. That core reading is the highest in two and a half years.
Inflation May Not Have Peaked Yet
Economists are warning that the worst may still be ahead.
RSM chief economist Joe Brusuelas said the pricing dynamics seen in May suggest that neither headline nor core inflation has yet reached its peak.
He added that the move higher in core inflation, which has historically been the best guide to where prices are heading over time, will be difficult to reverse in the near term and even harder to bring back toward the Fed’s 2% target.
New York Federal Reserve president John Williams said Thursday that he expects inflation to remain elevated in the coming months, with headline PCE closing in on 4% and core inflation staying above 3%.
He suggested the pace of increases could peak within a couple of months but made clear that policy needs to remain prepared to respond.
Goldman Sachs COO John Waldron said at a financial conference in New York that inflation is the single biggest risk in the current environment.
“Inflation, I would say, is probably the single biggest risk element. It’s the one that worries me the most personally,” Waldron said.
Rate Hike Risk Is Growing
For most of the past year, the Federal Reserve had been debating how quickly to cut interest rates. That debate has now shifted in a more concerning direction.
Most Fed officials currently favor holding rates steady, but a growing number are no longer ruling out the possibility of a rate increase if inflation proves persistent.
Fed governor Lisa Cook said in a speech this week that she is closely watching the risk that businesses embed higher energy costs into their pricing while workers push them into wage negotiations, creating a self-reinforcing inflation cycle.
Cook said she is “prepared to raise rates” if inflation does not fall in a timely manner.
Fed governor Chris Waller, who had previously been one of the more dovish members of the committee and had supported rate cuts, said inflation is now his primary concern over the labor market.
He is among at least five Fed officials who want to revise the central bank’s policy language to reflect that the next move could be either a cut or a hike, rather than signaling cuts only.
Fed Vice Chair Philip Jefferson said he expects inflation to ease later in the year as tariff effects and the energy shock from the war subside, but he acknowledged risks are tilted to the upside and he is watching closely for signs that high energy prices begin to suppress consumer spending.
American Households Are Drawing Down Savings
The inflation data arrived alongside a troubling signal from the Commerce Department about the state of household finances.
The personal savings rate dropped to 2.6% in April from 3.2% in March, indicating that Americans are spending more than their incomes alone can support and drawing down accumulated savings to cover the gap.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said rising prices are directly cutting into consumption and that the declining savings rate shows consumers are dipping into savings to make ends meet.
That dynamic is unsustainable over an extended period. If it continues, the drag on consumer spending that analysts have been anticipating could arrive more suddenly and more sharply than the gradual slowdown currently reflected in economic forecasts.
Bond Markets Are Already Pricing In a Rate Hike
The 2-year Treasury yield, which tracks market expectations for the Federal Reserve’s benchmark interest rate, is currently sitting around 4%, approximately 25 basis points above the upper end of the Fed’s target range of 3.5% to 3.75%.
That premium signals that bond investors are pricing in not just a prolonged pause in rate cuts but the possibility of an outright hike before the end of the year.
The situation puts incoming Fed Chair Kevin Warsh in an immediate and uncomfortable position.
Nominated by a president who has repeatedly called for lower borrowing costs, Warsh will take the helm of the central bank at a moment when the inflation data is pointing in the opposite direction.
Brusuelas summed up the challenge bluntly: if the Iran war is not resolved soon, the Federal Reserve will find it increasingly difficult to look past the inflation being driven by the energy supply shock that began when hostilities erupted three months ago.
The post Fed’s Preferred Inflation Gauge Surges to Three-Year High as Iran War Keeps Prices Rising appeared first on .
Continue reading...