Slowing U.S. inflation, yet consumer spending shows little enhancement
U.S. Consumer Spending Shows Modest Growth Amid Slowing Economy
WASHINGTON (Reuters) - Despite a decline in inflation rates, American consumers cautiously increased their spending in April, according to data released by the Commerce Department on Friday. Consumer spending, which comprises more than two-thirds of U.S. economic activity, rose 0.2% from the preceding month - meeting forecasts by economists surveyed by Reuters, following a 0.7% increase in spending in March. However, the U.S. economy has demonstrated deceleration in recent months.
The country's gross domestic product (GDP) contracted in the first quarter, recording the first quarters of U.S. President Donald Trump's current tenure - by an annualized rate of 0.2%. During the fourth quarter of 2024, it had grown by 2.4%. Trump's trade policies, currently under review by the U.S. justice system, are seen as a contributing factor to the slowdown. The potential erection of trade barriers could result in heightened prices, a concern also shared by the Federal Reserve. The central bank has delayed interest rate cuts until there is additional clarity regarding the impact of the administration's trade policy, which critics call erratic.
Inflation remained near the Federal Reserve's target of 2% in April. The central bank focuses predominantly on the development of prices within a fixed basket of consumer goods. The Personal Consumption Expenditures (PCE) index, calculated based on this model, increased by 2.1% year-on-year in April, according to the Commerce Department. Economists had anticipated a decline to 2.2%, following a value of 2.3% in March. Analyst Tobias Basse of NordLB noted that, so far, the U.S.'s new trade policy has shown no substantial impact on inflation trends within the country.
The core PCE index, which excludes volatile food and energy prices, fell as forecast to 2.5% in April, from 2.7% in March, revised. Economic analysts continue to monitor the effects of the U.S.'s trade policies on both inflation and growth, as the situation evolves.
(Reporting by Lucia Mutikani, written by Reinhard Becker, edited by Klaus Lauer - For further questions, please contact our editorial team under [email protected] (for politics and economics) or [email protected] (for companies and markets).)
Enrichment Data Integration:The recently implemented U.S. trade policies, featuring tariffs on a vast array of imports, have begun to affect both inflation and economic growth. Prices for consumer goods have risen due to these new tariffs, although there is uncertainty regarding the full extent of the effect on inflation. The initial surge in consumer good prices is estimated to be around 1.4%, though this could vary depending on how fully the tariffs are passed on to consumers. Investment goods, by contrast, are projected to experience much larger price increases; estimates suggest a 9.5% spike in prices for investment goods versus 2.2% for consumption goods under a 25% tariff scenario.
The trade policies are also projected to impact economic growth, with J.P. Morgan Research estimating that they could lower annual U.S. GDP growth by approximately 0.2 percentage points, bringing the forecast for 2025 down to 1.3%. Higher costs for investment goods due to tariffs may result in reduced business investment and raise domestic production costs, potentially slowing economic activity even further.
There are concerns that trade policies could lead to an economic slowdown and even increased unemployment, although sustained high inflation is less likely without strong wage growth. The Federal Reserve may respond with interest rate cuts if economic conditions deteriorate, but such a move would reflect underlying economic challenges.
The implementation of the U.S. trade policies has led to a rise in prices for consumer goods, making it essential for financially savvy consumers to reconsider their investing strategies to mitigate the impact of these price increases. With potential investment good price hikes looming, careful evaluations of investment opportunities could ensure sustained financial growth amidst the slowing economy.
