Price cuts, weaker spending could bolster Fed’s faith in inflation outlook

WASHINGTON — Price cuts by major U.S. retailers and new data showing a slowdown in consumer spending may boost the Federal Reserve’s confidence in falling inflation and take the edge off of corporate profits that have grabbed a larger share of national income since the start of the COVID-19 pandemic.

Adjusted for inflation both overall consumption and disposable income dropped slightly in April. The Commerce Department had reported on Thursday that the U.S. economy grew more slowly than initially thought over the first three months of the year largely because of a lowered pace of consumption, a core prop of the economy that Fed officials feel needs to cool for inflation to return to the central bank’s 2% target.

Inflation data released on Friday showed the personal consumption expenditures price index rose at a 2.7% annual rate in April, matching the gain in March. The Fed uses PCE inflation to set its 2% inflation target, while the “core” index stripped of volatile food and energy prices rose 2.8%, also the same as the month before.

Policymakers have been worried that progress back towards the central bank’s inflation target may have stalled after a steady decline from the peak above 7% in June 2022.

But while the headline numbers pointed to another lost month, there were signs of change. Core prices rose less than expected on a month-to-month basis, and the twin declines in “real” consumption and income confirmed the sense of an economy easing gradually back from a period of fast growth and price increases.

“While American household balance sheets remain solid in our opinion, the margin for discretionary spending has been much thinner,” said Tuan Nguyen, an economist at RSM US, an observation that matched new data showing spending had slowed for things like recreational goods as consumers spent more for housing and utilities.

“More likely than not, the economy is cooling down to a soft landing, which gives the Fed a reason to rethink its hawkish stance on keeping interest rates at a multi-decade high level … If we get more data like this in the coming months … we think the Fed should act sooner rather than later,” he wrote in an analysis of the new inflation and consumption report.

The U.S. central bank is expected at its June 11-12 policy meeting to keep its benchmark interest rate steady in the 5.25%-5.50% range, where it has been since last July. Fed officials say the next move on rates will likely be to lower them, but not until they feel assured inflation will resume its decline to 2%.

Investors expect an initial rate cut at the Fed’s September meeting, though by a slim margin.