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02:08 - Source: CNN
Minneapolis CNN  — 

Inflation may be continuing to cool but there’s also a chill running through the American consumer, the latest report from the Commerce Department shows.

The Federal Reserve’s preferred inflation gauge eased further in March, a sign that the central bank’s massive rate-hike campaign is taking hold.

The Personal Consumption Expenditures price index rose 4.2% for the 12 months ended in March, down from an upwardly revised 5.1% in February.

The closely watched core PCE index — where the more volatile components of food and energy are excluded — trended down as well, but only ever so slightly: The Fed’s go-to gauge was up 4.6% for the year, a slight easing from the 4.7% growth rate notched in February.

On a monthly basis, the headline and core indexes grew 0.1% and 0.3%, respectively. In the month prior, both headline and core PCE indexes ticked up 0.3%.

The PCE indexes are part of the Personal Income and Outlays report, which provides a more comprehensive look at shifts in prices, including how consumers respond to them, as well as how much consumers are spending, bringing in and saving.

And after a January surge, consumer spending growth has trailed off considerably.

Spending was flat in March, the report showed. While that beat expectations for a slight month-on-month decline of 0.1%, spending patterns for the month indicated that narrative of the “robust and resilient” consumer doesn’t stack up any more, said Tim Quinlan, senior economist at Wells Fargo.

Inflation-adjusted consumer spending has fallen for four of the past five months, he said.

“This is a consumer that’s retrenching,” Quinlan told CNN. “This is not a consumer with a devil-may-care attitude that just can’t be stopped and can spend through anything.”

The largest increases in consumer expenditures during March were for housing expenses and health care, according to the report. Aside from higher spending at restaurants and other service businesses, consumers cut back in pretty much every other area.

“Almost all of the growth is in services outlays, and the only fun services outlay in there is food services and accommodations,” he said. “And you can hardly blame people for wanting a break, given the higher costs of everything elsewhere.”

Persistently high inflation, labor market uncertainty dragging down sentiment

Consumer sentiment has been weighed down by the continued stretch of high prices.

Separately on Thursday, the University of Michigan released its final consumer sentiment report for April. The survey results showed that sentiment held steady at the preliminary reading of 63.5.

“The mild recovery in consumer sentiment we saw last fall and winter appears to have stalled. Consumers are bracing for the labor market to weaken,” Joanne Hsu, director of the university’s Surveys of Consumers, said in a statement on Friday.

“Sustained, meaningful improvements in economic conditions — which will have to come from cooling inflation, given how little room there is for labor markets to strengthen — will be required for their sentiment to rise again,” she added.

Still some gas in the tank

Although spending has softened, the Commerce Department report doesn’t appear to show that a more alarming deterioration is occurring, said Bernard Yaros, economist at Moody’s Analytics.

Personal income grew in March by 0.3% and the personal saving rate increased to 5.1%, the highest since December 2021.

Real disposable income grew again in March, marking nine consecutive months of gains, Yaros noted.

“That suggests that the consumer still has the wherewithal to spend,” he said.

Separately, a report published Friday by the Bureau of Labor Statistics showed a 1.2% uptick in workers’ wages and benefits during the first quarter.