U.S. inflation hits three-year high as incomes slip in April

Households got another reminder that the inflation squeeze is still biting: prices rose faster in April even as paychecks failed to keep up, leaving families with less room for groceries, gas and discretionary spending. The Commerce Department’s preferred inflation gauge, the personal consumption expenditures index, jumped 3.8% from a year earlier, up from 3.5% in March and the highest reading since May 2023.

The monthly rise eased to 0.4% from March’s 0.7% surge, but the relief was modest. Higher gasoline and food costs remained major pressure points, and the core PCE measure, which strips out food and energy, still rose 3.3% from a year earlier, its strongest pace since November 2023. On a monthly basis, core prices increased 0.2%, a sign that inflation was not confined to a single volatile category.

Income data told an equally uneasy story. The Bureau of Economic Analysis said personal income decreased less than $0.1 billion in April, while disposable personal income fell $19.9 billion. With prices still climbing, real incomes slipped 0.1%, a warning that consumers are absorbing higher costs without seeing purchasing power improve. For many households, that means essentials are taking a larger share of the budget and extras are easier to cut.

Spending still rose, but the strength came with a thinner cushion. Personal consumption expenditures increased $111.1 billion, including a $67.2 billion gain in services and a $44.0 billion rise in goods. The personal saving rate dropped to 2.6%, its lowest level in nearly four years, suggesting families were leaning harder on savings to keep spending patterns intact.

The data sharpened the policy dilemma in Washington, D.C. Inflation remains well above the Federal Reserve’s 2% target, and the Federal Open Market Committee said after its April 28-29 meeting that it would keep assessing labor market conditions, inflation pressures and inflation expectations. Economists now see interest rates staying unchanged well into next year. The political stakes are rising too, with President Trump and congressional Republicans facing the prospect of stubborn prices as midterm campaigning approaches.

Consumer sentiment is already reflecting the strain. The University of Michigan’s sentiment index fell from 49.8 in April to a record low 48.2 in May, while long-run inflation expectations rose from 3.5% to 3.9%. The Federal Reserve Bank of Cleveland had projected April PCE near 0.40% month over month and core PCE around 0.27% before the official release, underscoring how little room there is for households, or policymakers, to expect a quick reprieve.