The first inflation report under new Fed chief Kevin Warsh shows prices at highest in nearly 3 years

The first inflation report under new Federal Reserve chief Kevin Warsh was released on Thursday, and it shows consumer prices in April were at their highest level in almost three years. 

The personal consumption expenditures price index — the Fed's preferred inflation measure — rose last month at an annual rate of 3.8%, the Commerce Department reported on Thursday. That's up from 3.5% in March and 2.8% from February, and the highest since May 2023.

Economists had expected April's PCE report to show annual inflation rising to 3.9%, according to economists polled by FactSet. 

So-called core PCE, which excludes volatile energy and food prices, rose 3.3% in April on an annual basis, in line with economists' forecasts.

Warsh's first test

Warsh is stepping in as Fed chief with a major challenge on his hands, given that inflation is flaring due to the impact of the Iran war on energy prices. Earlier this year, the central bank had forecast one interest rate cut in 2026, a prediction that economists now say is growing less likely given the jump in fuel costs.

Complicating his challenge is President Trump's eagerness for the central bank to lower borrowing costs for consumers and businesses, which would boost economic growth.

While the rise in consumer prices in April was slightly cooler than expected, "that's little comfort on Main Street, where people are facing the highest inflation in 3 years and having their wage gains wiped out by inflation," said Heather Long, the chief economist at the Navy Federal Credit Union, in a social media post.

Energy costs saw the biggest increase in April, but prices also rose in other spending categories, according to the Commerce Department figures. The costs of housing and utilities, recreation services and food services also saw large jumps in April, the data shows.

Some economists are now penciling in a possible rate hike later this year. There's now a 40% probability that the Federal Reserve will hike rates at its December meeting, up from 3% at its June meeting, according to CME FedWatch, which bases its predictions on 30-Day Fed funds futures prices.

Income growth lags inflation

Several other measures in the report highlight the financial struggles facing many U.S. households, helping explain why consumer confidence has plunged to an all-time low.

For instance, the report shows that annual personal income growth slowed to 2.5%, falling below the pace of inflation. That means households are losing purchasing power because their incomes aren't keeping up with rising prices.

"Inflation is at a three-year high, and personal savings have cratered to one of the lowest levels in the past 20 years," Long said in an email. "Many Americans are spending more than the income they have coming in. This is not sustainable, especially for lower-income and middle-class households."

Consumer spending rose 0.5% in April from March, though most of that reflected price increases. Adjusted for inflation, spending rose just 0.1% in April, down from 0.3% the previous month. 

The personal savings rate fell to 2.6% last month from 3.6% in March, suggesting that some households are tapping their savings to cope with higher costs, economists said. 

"Rising prices are really taking a bite out of consumption, and the decline in the savings rate shows consumers are dipping into savings to make ends meet," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, in an email.