"Running out of that buffer"

The April inflation and growth data landed on the same day, and neither number was going in the direction policymakers wanted. The Personal Consumption Expenditures Price Index—the Fed’s preferred inflation gauge—rose 3.8 percent year over year including food and energy, the highest reading since May 2023. Meanwhile, the first-quarter GDP estimate was revised down four-tenths of a point to 1.6 percent annualized. The combination of sticky inflation and slowing growth is the kind of signal that makes economists uneasy, and the episode spent most of its time working through what those two numbers mean for households, businesses, and the Federal Reserve.

The GDP revision and what it reveals about business behavior

The downward revision to GDP came from both the consumption and investment sides of the ledger, which Professor Tara Sinclair of George Washington University described as “a big area of concern” because those components are the ones that tell you what is coming in future quarters. She called it “a deer in the headlights moment for American businesses.” Companies are freezing—not investing, not hiring, not expanding—because they cannot read where the economy is heading next. That paralysis is itself a drag on growth, and the 1.6 percent annualized figure is lower than the economy needs to be running.

PCE inflation and the energy pass-through