The battle against inflation may yet be over, with the latest personal income data from the US Bureau of Economic Analysis reporting a 0.4 per cent growth in April (US$80 billion/AU$122 billion), following a 0.3 per cent rise in March.
Disposable personal income (DPI) also increased 0.4 per cent (US$79.4 billion/AU$121 billion), while consumer spending grew 0.8 per cent to US$151.7 billion (AU$231 billion).
Meanwhile, personal saving as a percentage of DPI eased to 4.1 per cent in April, down from 5.1 per cent in March.
The bureau’s latest personal consumption expenditure (PCE) price index also reported a 0.4 per cent increase in April and 4.7 per cent in annualised terms — exceeding expectations of a 0.3 per cent monthly increase (4.6 per cent annually).
According to James Knightley, chief international economist at ING Economics, this latest data suggests inflationary pressures persist despite a cumulative 500 bps in monetary policy tightening in just over a year.
He said the surprise increases would support the case for further tightening from the Federal Reserve when the Federal Open Market Committee (FOMC) meets in June.
“The April US personal income and spending report is a fair bit stronger than expected across the board, which will fuel talk of another Federal Reserve rate hike at either the June or July meetings,” he said.
Mr Knightley said these pressures would likely ease over the second half of 2023, but acknowledged the Fed would not wait and see.
“…We are increasingly doubtful the Fed will have the patience to hold back from hiking, especially if the spending side is holding up as well as it seems,” he continued.
This undermines hopes of a pause to the Fed’s tightening cycle, as recently hinted by Fed chair Jerome Powell.
Mr Powell told an audience at a conference in Washington that the Fed may need more time to assess the “lagged effects” of 500 bps in tightening in just over a year.
“…Our guidance is limited to identifying the factors we’ll be monitoring as we assess the extent to which additional policy firming may be appropriate to return inflation to 2 per cent.
“The risks of doing too much or doing too little are becoming more balanced and our policy adjusted to reflect that.”
But ultimately, Mr Knightley said he anticipates a “major reversal” in the Fed’s monetary policy stance.
Given this looming reversal, he fears the Fed risks triggering a steep recession with excessive monetary policy tightening.
“We fear that the likely result is we get over-tightening of monetary policy that, in combination with significantly tougher lending standards that will restrict the flow of credit, will tip the economy into what could be a painful recession,” he continued.
To revive a floundering economy, the Fed may need to commence an “even greater interest rate cut story further down the line”.
In Australia, the Reserve Bank (RBA) will meet next week to determine its next monetary policy move.
Analysts are split, with some observers expecting one last 25 bps hike to the cash rate, taking the terminal rate to 4.1 per cent.
Others, however, including CBA economists, believe rates have hit their peak, with this view supported a run of weaker than expected economic indicators.
