Improving Economic Conditions for the American Consumer

April’s Inflation Data

April’s Consumer Price Index (CPI) came in better than expected, rising 2.3% y/y. April’s data improved relative to March, and Core CPI (CPI excluding volatile food and energy prices) rose 2.8% y/y, which is in line with the March print. Core CPI increased 0.2% m/m, which marks the third-straight month of softer-than-forecasted readings. Additionally, goods prices such as new cars and apparel did not see the kind of price increases that analysts expected. Companies may be absorbing tariff-related price increases instead of passing them on to the consumer. The 90-day pause on reciprocal tariffs between the U.S. and China improves the inflationary outlook, and thus the environment for consumers.

Inflation has come down by nearly 70% since its peak at over 9% in the summer of 2022, and stable price levels have benefited consumers. Services, which make up 60% of the CPI reading, continue to be a point of contention for overall price levels. Over the last twelve inflation readings, service prices are increasing at an average rate of 2.8% y/y. From 2016 through 2018, service prices rose at an average rate of 1.71% y/y. Food is also rising at a higher rate than before the pandemic; food prices have risen by an average rate of 0.32% y/y over the last twelve inflation prints, compared to 0.12% y/y in the years leading up to the pandemic.

That said, prices are not rising at the same pace that they were in 2022. Throughout 2022, services rose by an average rate of 3.2%, goods by 1.6%, food by 1.3%, and energy by 1.7%. Today’s economy is considered to be disinflationary, a slowing of the pace of price inflation, not necessarily deflation, which would indicate falling price levels. A slower pace of inflation is beneficial for consumers since wages are growing in excess of price increases.

Chart 1: Services Remain the Primary Driver of Inflation^[1]

Additionally, the data we received over the last few weeks has been beneficial for consumers. In March, personal income rose 0.5% and personal spending rose 0.7%. In the first quarter, personal consumption (a component of GDP) came in above estimates at 1.8%. These data points indicate a spending U.S. consumer who is not showing precautionary habits. Average hourly earnings are expanding by 3.8% y/y, which is above pre-pandemic levels. Once again, the consumer is 70% of GDP – a strong, spending consumer is correlated to greater economic growth and expansion.

Increasing consumer spending likely indicates the labor market is doing well, which is also the case. Market pundits have stated for many months that the labor market is cracking, and consumers will be hit, which has yet to be seen in the data. Initial jobless claims, which provide a weekly update on how many new Americans are claiming unemployment in any given week, have been range-bound since last summer around 240K. During recessions, this figure averages 350-375K per week; we are still well below these levels. Non-farm payroll reports in 2025 have been positive and show no signs of fear, along with a healthy unemployment rate at 4.2%. We continue to watch initial jobless claims and listen to company management for any signs of a hiring slowdown, or even an uptick in layoffs. For now, the labor market is balanced, leading to healthy consumer activity.

Chart 2: Job Gains and Weekly Unemployment Claims are Steady^[2]

Overall, economic data is telling a different story than stock prices have over the past few weeks. Inflation continues to decline, and the labor market is well balanced. Pauses on higher, reciprocal tariffs benefit the economic backdrop, and the major banks are reducing their recession probabilities. The U.S. economy appears to be expanding at a positive rate, which allows for companies to grow earnings and improve margins. As we say, stocks follow profits, and tariff clarity and improving economic conditions should benefit U.S. corporations and the American consumer.

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Sources:

^[1] Source: Bloomberg. As of May 12, 2025.

^[2] Source: Bloomberg. As of May 12, 2025.

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