Donald Trump’s tariffs triggered a sharp downturn threatening a recession. (Photo: NYI Collage)
Trumpflation has gripped the economy. Prices are rising led by food and gasoline as Trump’s Iran war grinds on in a stalemate.
In the latest reading on the economy, the Personal Consumption Expenditures (PCE) index rose 3.8% in April, up from 3.5% in March, according to the U.S. Bureau of Economic Analysis (BEA), which tracks inflation.
On a “core” basis, excluding volatile food and energy prices, PCE was up 3.3%, also in line with expectations and up a tenth from 3.2% in March. Still, that’s the highest level in two and a half years.
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The latest data, although in line with Federal Reserve expectations, shows higher costs are rippling through the economy, affecting everything from the cost of mortgages to consumer prices.
Significantly, the data suggests the Fed will hold the line on further rate cuts that could help consumers. The Fed, which sets interest rates for overight loans between banks, is shifting its focus from the job market to inflation.
To the contrary, a number of analysts and Fed watchers see a rate hike if inflation becomes persistent. Such a move would slow the economy.
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Federal Reserve governor Lisa Cook said in a speech on Wednesday that she’s “prepared to raise rates” if inflation doesn’t fall in a “timely manner.”
Fed governor Chris Waller, who was leaning toward a rate cut because of conern about the job market, now says inflation is a bigger concern.
The two-year Treasury yield, a leading indicator of the Fed’s interest rate policy, is already flashing warning signs. It’s up 25-basis-points at 4 percent over the Fed’s target range of 3.5 percent to 3.75 percent.
The differenced is troubling because it indicates that financial markets are pricing in future Fed interest rate hikes instead of the cuts that had been anticipated.
The fear is that inflation is entrenched and economic conditions are forcing the central bank to keep borrowing costs restrictively high.
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A higher two-year yield directly impacts interest rates on corporate loans, credit cards, and adjustable-rate mortgages, which acts as a brake on consumer spending and economic activity.
Consumer concerns are reflected in the The U.S. Index of Consumer Sentiment (ICS), published by the University of Michigan. It currently stands at 44.8, a highly pessimistic economic outlook. Low consumer sentiment can precede pullbacks in consumer spending.
The reading represents a 10 percent drop from the previous month, an historic low, not seen since 1980 and the third decline in a row.
Trump’s stalwart base — lower-income consumers and those without college degrees — are reporting the steepest declines in optimism.
Consumer spending accounts for roughly two-thirds of U.S. economic activity. Any pullback could tip the economy into a recession.
Meanwhile, Gross domestic Product (GDP), a measure of economic activity fell to 1.6 percent on an annualized rate last quarter, according to the Commerce Department’s Bureau of Economic Analysis.