Fed’s Favorite Inflation Gauge Expected to Rise 0.2% in April, Smallest Increase This Year

Key Takeaway

• The Fed's preferred inflation gauge, the core PCE price index, is expected to rise 0.2% in April, marking the smallest increase this year.
• Despite modest cooling in inflation, Fed officials emphasize the need for more evidence before considering rate cuts.
• Personal spending and income data will provide insights into consumer demand amid a cooling labor market.

Modest Relief in Inflation

The Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index minus food and energy, is expected to show a modest rise of 0.2% in April, marking the smallest advance this year. This data, due on Friday, provides a clearer picture of underlying inflation and is crucial for the Fed's assessment of price pressures. The overall PCE price index is projected to climb 0.3% for the third consecutive month, highlighting the uneven progress in the Fed's battle against inflation. The annual rise in the PCE price measure is seen at 2.7%, with the core metric expected at 2.8%, both matching the prior month's levels.

Fed Chair Jerome Powell and his colleagues have emphasized the need for more evidence that inflation is on a sustained path to their 2% goal before considering interest-rate cuts. The minutes from the Fed's last meeting revealed that many officials questioned whether current policy was restrictive enough to bring inflation down to target levels. "The report will likely provide some encouraging signs that the disinflation process hasn’t completely stalled," noted Bloomberg economists Anna Wong, Stuart Paul, Eliza Winger, and Estelle Ou. They added that slowing income growth in a cooling labor market should continue to exert a disinflationary impulse throughout the year.

Fed's Rate Decision Looms

The upcoming Federal Open Market Committee (FOMC) meeting on June 11-12 is a focal point for traders, who will be closely monitoring two CPI inflation reports and a personal income and spending report, which includes the Fed’s preferred inflation gauge. Additionally, the May non-farm payrolls report, due in early June, will provide further insights into the rate trajectory. Fed Chair Jerome Powell reiterated on Tuesday that inflation remains elevated, suggesting that rates might stay on hold for longer. However, the market interpreted his comments as indicating a potential rate cut as early as September.

David Rosenberg, founder and president of Rosenberg Research & Associates, pointed to the National Federation of Independent Business’s (NFIB) small business survey as a source of optimism. He noted a notable downtrend in both current and future pricing power, which could allay some concerns about pricing pressure. "Ahead of tomorrow’s CPI report, some encouraging news from today’s NFIB small biz survey on current pricing and future pricing power. The downtrend in both is notable. The Fed Beige Book nailed this," Rosenberg shared on X.

Goods Prices and Inflation Debate

A key question in the Fed's inflation debate is whether goods prices will continue to fall. Lower prices for items like apparel and used cars were significant drivers of the faster-than-expected decline in inflation in the second half of 2023. However, the pace of price declines has slowed in 2024, contributing to higher inflation readings. Fed officials are divided on whether supply chains have fully recovered from pandemic and war-related disruptions. Powell suggested that there could be more improvement and thus lower prices, while others, like Scott Anderson, chief US economist at BMO Capital Markets, remain cautious. "The real wild card on the inflation outlook is the goods side of the equation," Anderson said. "It will continue to keep the Fed cautious."

Minutes from the Fed's April 30-May 1 policy meeting highlighted the importance of developments in goods prices. While supply chain improvements had supported disinflation for goods prices over the previous year, a more gradual pace of such improvements could slow progress on inflation.

Street Views

• Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, Bloomberg Economics (Cautiously Optimistic on US inflation):

  "The report will likely provide some encouraging signs that the disinflation process hasn’t completely stalled. With income growth slowing in a cooling labor market, consumers are gradually cracking, which should provide a continued disinflationary impulse in the rest of the year. Yet, with catch-up price pressures still in the pipeline, inflation will likely moderate only very gradually this year."

• Joachim Nagel, Bundesbank President (Neutral on ECB rate cuts):

  "The probability is increasing that in 13 days we will see the first rate cut. If there’s a rate cut in June, we have to wait, and I believe we have to wait till maybe September."