Inflation in the United States showed signs of moderation in April, with key price gauges barely moving and the annual rate of inflation inching closer to the Federal Reserve's two percent target. The personal consumption expenditures (PCE) price index, a crucial inflation measure for the Fed, increased by a mere 0.1% for the month, following a March where the index was reportedly flat. This continued period of relief saw the annual inflation rate for April settle at 2.1%, down from 2.3% in March and the lowest since September of the previous year. The Commerce Department's report on Friday indicated that these figures emerged even as the impact of tariffs implemented by President Donald Trump earlier in the month had not yet materialized in consumer prices.

Excluding volatile food and energy prices, the core PCE index also rose by just 0.1% in April, with the year-over-year core inflation rate standing at 2.5%. This annual figure was down from 2.6% in March and marked the smallest year-over-year increase since March 2021. Federal Reserve officials tend to focus more on this core reading as a better indicator of underlying long-term inflation trends. While inflation slowed, personal income saw a significant surge of 0.8% in April, well ahead of forecasts. Conversely, consumer spending growth decelerated sharply to 0.2%, following a more robust 0.7% increase in March. This cautious consumer behavior was also reflected in a notable jump in the personal savings rate, which rose to 4.9%, its highest level in nearly a year. Specific price movements showed food prices declining by 0.3% during the month, while energy goods and services increased by 0.5%. Shelter costs, a persistently stubborn component of inflation, rose by 0.4%.

The specter of President Trump's trade policies loomed over the economic data. Trump had implemented across-the-board 10% duties on all U.S. imports, along with selective reciprocal tariffs, in an effort to address the U.S. trade deficit, which reached a record $140.5 billion in March. While the April inflation data did not yet reflect these tariffs, economists anticipate that their costs will eventually be passed on to consumers. Some projections suggest that core PCE inflation could peak between 3.0% and 3.5% later in the year if the current tariffs remain in place. However, while economists express concern that tariffs could spark another round of inflation, the historical record suggests their impact is often minimal. The implementation of these tariffs has faced legal challenges. An international court initially struck down most of Trump’s tariffs—including duties on imports from Canada, Mexico, China, and over 50 other countries—ruling that Trump had exceeded his authority. Tariffs on steel, aluminum, and cars, implemented under different laws, reportedly remain in place. Despite the initial ruling, an appeals court subsequently granted the White House a temporary stay, allowing the duties to remain in effect during the appeal. The Trump administration has expressed its determination to implement the tariffs, seeking other legal authorities if necessary, leaving the final status and duration of these duties highly uncertain.

The Federal Reserve has been closely monitoring these developments. Despite President Trump's calls for the central bank to lower its key interest rate, policymakers have remained hesitant, preferring to await more clarity on the longer-term impacts of the administration's trade policies. At their meeting in early May, Fed officials acknowledged that inflation remained elevated compared to their 2% target and expressed support for keeping the key interest rate steady. They also voiced concerns about potential tariff-induced inflation, particularly at a time when worries about the labor market are also rising. The combination of higher prices and slower economic growth raises the unwelcome prospect of stagflation, an economic condition not seen in the U.S. since the early 1980s. A recent meeting between President Trump and Fed Chair Jerome Powell reportedly did not include discussions on the future path of monetary policy, with the Fed emphasizing its commitment to making decisions free from political considerations.

Overall, the April data indicated that inflation continues to decline from its post-pandemic spike, which saw price increases reach a four-decade high in July 2022. However, the uncertainty surrounding tariffs and their potential to reignite inflationary pressures remains a key concern for economists and policymakers alike, as they navigate a complex economic landscape.