April inflation: Hot & sticky

May 28, 2026

The Federal Reserve’s favored inflation gauge, the personal consumption expenditure (PCE) index, came in hot and sticky in April. Five years after the pandemic inflation shock, the effects are still compounding. The level of prices is too high for too many.

The PCE index rose 0.4% in April after jumping 0.7% in March, the largest three-month surge since the spring of 2022. It is up 3.8% from a year ago, the hottest pace since May 2023. That is 0.4% higher than inflation was in July 2023, when the Fed last raised rates. 

Energy prices are driving headline inflation, with gas prices posting their fastest two-month rise on record. Food prices are climbing as well, but most of those increases preceded the war. The largest impact of higher prices at the grocery store will hit later in the year and could spill into 2027.

Emerging markets are already suffering shortages, which is affecting the planting season. That will show up with a lag in the US and could add to food insecurity across emerging markets, which are forced to ration cooking oil. Even countries that produce oil are suffering because they lack the refining capacity to leverage those resources.

Food and energy prices in the current context are particularly important to the Fed. They are necessities and amplify the unmooring of inflation expectations due to the post-pandemic inflation. 

Recent manufacturing surveys revealed that firms are buying ahead of expected price increases. That is the exact behavior the Fed is charged with preventing; it can create its own vicious cycle of inflation. 

Core PCE, which strips out food and energy, rose 0.2% in April, a slight cooling from the 0.3% increase of March. (It was just barely below 0.3% before rounding.) That translates to 3.3% from a year ago, with gains in both goods and services. The annual reading is the hottest pace since November 2023. The Fed still had a bias to raise rates back then. 

Import prices picked up more broadly in April, much of which will show up with a lag in the PCE index in May and June. Those prices were in effect prior to the effects of tariffs, which are lower than they were at the start of the year.  Tariffs designed to recoup the revenue losses due to the Supreme Court’s ruling on tariffs are slated to hit in August.

Vehicle prices were steadier during the month, in part because producers absorbed much of the rise in costs due to tariffs and war. That relief will be temporary. Those costs are still moving through the pipeline, while the jump in gas prices has already eaten into the boost that tax refunds provided.

Super core services, which exclude shelter, slowed to 0.1% in April from 0.3% in March, keeping annual growth at 3.5%. The super core services have been range bound since the start of the year; that measure is running more than one percentage point above its pace during the pre-pandemic norm. 

Portfolio services, including asset management and advisory, fell during the month. The problem is the rest of the service sector, which continues to move higher and is providing a floor under the overall inflation figures. The increases predate the war and underscore the stickiness of service sector inflation, a major concern for the Fed.  

Preliminary data for the month of May is not encouraging. The Cleveland Fed’s nowcast suggests CPI and PCE indices will easily cross 4% in May.  Many within the Fed have already signaled a pivot in their concerns this week. That suggests a hard road ahead for new Fed Chairman Kevin Warsh, who will likely be tested on his inflation-fighting resolve by the bond market. 

Saving rate dips to lowest level since 2008

Personal disposable income was flat prior to adjusting for inflation and fell 0.5% after adjusting for inflation. That marked the third month of inflation-adjusted declines and came despite a surge in tax refunds and expansions to tax cuts for higher income households. Much of the fiscal stimulus we had as a tailwind in 2026 was wiped out by higher inflation, which the war in Iran exacerbated. 

Restrictions to Medicaid and the Supplemental Nutrition Assistance Program (SNAP) placed a drag on income. Social Security and Medicare payments continued their upward march, reflecting aging demographics.

Consumer spending held up a little better. Spending rose 0.1% in April, after rising 0.3% in March. Goods were hit harder than services but moderated during the month. Big ticket items were hit the hardest.

The housing slump and higher long-term yields are biting. Spending on financed purchases like furniture, appliances and vehicles fell. Consumer electronics held up, along with spending at sporting goods stores; costs will hit with a lag. Brace for a rise in the threshold one must spend to qualify for free delivery across many online retailers. 

The saving rate plummeted to 2.6%, its lowest level since April 2008 (not counting the one-month dip to 2.2% in June 2022 due to COVID), which was after the start of the 2008-09 recession. People were relying heavily on housing market debt back then. Debt loads are more contained as a share of income today and homes have much more equity in them, even among those at who are struggling to make mortgage payments.

However, delinquencies among older workers with student loans and among subprime borrowers have moved up considerably in recent months. Some of those increases represent whiplash: stimulus and loan forbearance are over.

First quarter loses steam

Real GDP growth was revised down to 1.6%, 0.4% below the initial estimate for the quarter. Inflation took a bigger bite out of consumer spending than initially reported. Spending on healthcare slowed with restrictions on Medicaid outlays. Market volatility formed another drag, causing some hesitation among more affluent households.

The trade deficit widened on more rapid gains in imports and slower exports. Chips and data-center components, aided by tariff waivers, drove much of that jump. Front-running was another factor, as the Supreme Court’s ruling on tariffs created a narrow window to get goods into the country either tariff-free or with a lower tariff rate. 

Inventories were drained more than originally reported, but manufacturing is showing some signs of life. A rebuilding of inventories should provide a bit of a tailwind for the second quarter.

Tax cuts are another plus. Last year’s tax cuts enabled firms to fully expensing of spending on new equipment and plants, which has dampened the rise in costs due to tariffs and war.