US consumer spending barely budged in April even as annual inflation surged to its highest level since 2023, with the Iran war's impact on energy prices increasingly rippling through the American economy and squeezing household finances.
Inflation-adjusted consumer spending rose just 0.1% last month, while the personal consumption expenditures price index climbed 3.8% from a year earlier, according to a report from the Bureau of Economic Analysis released Thursday.
The core PCE index, which strips out food and energy, rose 3.3% year-on-year, though the closely watched monthly increase in core PCE came in at 0.2% — slightly below expectations, offering a sliver of relief to markets. US stock index futures pared losses after the release, while 10-year Treasury yields fell.
The numbers paint a picture of a consumer under growing strain. Inflation-adjusted disposable income fell 0.5% in April, marking the third consecutive monthly decline, while the saving rate dropped to 2.6% — its lowest since 2022.
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Personal income was flat, with wages and salaries advancing just 0.2%. The surge in fuel costs sparked by the Middle East conflict has driven consumer sentiment to record lows, with prices at the pump rising to their highest levels in nearly four years.
Retailers are feeling the heat too. Walmart's Chief Financial Officer John David Rainey told Bloomberg last week that while high-income consumers are "spending with confidence in many categories," low-income consumers are "more budget-conscious, trying to navigate certain financial distress."
Brent crude futures, while easing slightly this week, remain more than 30% higher than before the war began.
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The inflation data is likely to reinforce warnings from Federal Reserve officials about the prospect of interest rate hikes. Kevin Warsh, sworn in as Fed chairman on May 22, will need to convince colleagues that such hikes are unnecessary to keep inflation expectations anchored.
Separately, the Bureau of Economic Analysis revised first-quarter GDP growth down to a 1.6% annualised pace from an initial estimate of 2%, following downward revisions to inventory investment and consumer spending — adding to concerns about the economy's underlying momentum.
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