The US Q1 GDP growth revised down, as rising PCE inflation adds to strain on households.
In response to the latest US PCE inflation and GDP data, Jonathan Raymond, investment manager at Quilter Cheviot, shares his thoughts.
“Today’s US PCE inflation data capture the first two full months following the outbreak of conflict in the Middle East and the initial impact of the resulting oil price shock. Headline PCE came in at 3.8% year-on-year in April, up from 3.5% in March, while monthly inflation rose by 0.4% compared to 0.7% in March. Core PCE, the Federal Reserve’s preferred measure which strips out food and energy, also moved higher to 3.3% from 3.2% previously.
“With wage growth at 3.6% lower than the PCE inflation rate, many Americans will be feeling the squeeze on their pay packets and recent surveys have already outlined dismal consumer sentiment. With no resolution for the Middle East agreed as yet, elevated costs – particularly in energy and transport – will continue feeding through to consumer prices. This will erode spending power and weigh even further on sentiment and demand in the months ahead.
“Meanwhile, revised figures show US GDP grew by 1.6% in the first quarter of the year. While this is still an improvement on the 0.5% growth recorded in the final quarter of last year, it is notably weaker than initial estimates which showed 2% growth and primarily reflects revisions to investment and consumer spending.
“Taken at face value, this still points to an economy that entered the year on relatively solid footing. However, the composition of this growth is less reassuring. Much of it was driven by a rebound in government spending following last year’s shutdown, rather than momentum elsewhere. As higher energy costs and heightened uncertainty begin to filter through more fully, it is unlikely to be sustained, and we can expect to see a substantial dampening effect in the coming GDP prints.
“With Kevin Warsh now sworn in as the 17th chair of the Federal Reserve, his new position is one relatively few will envy. The President continues to mount pressure on policymakers to cut rates, even as inflation remains elevated and the economic outlook is increasingly uncertain. While Warsh will be inclined to lower interest rates over the longer term, the near-term backdrop leaves very little room for manoeuvre, particularly given any misstep could prove costly.”
