Fed’s Preferred Metric Shows Little Progress on Inflation Fight

May 31, 2024

Inflation came in line with expectations in April according to the Federal Reserve’s preferred inflation gauge, providing little clarity to a market on edge about when the Fed will start cutting interest rates.

The personal consumption expenditures (PCE) price index increased 0.3% for the month and 2.7% from a year earlier, according to the Commerce Department. Both figures were in line with Wall Street expectations.

The “core” PCE, which strips out volatile components like food and energy and is considered by economists to be a better indicator of inflationary pressure, increased just 0.2% for the month and 2.8% annually. The annual figure was 0.1 percentage point higher than expected.

Fed officials prefer to base their decisions on the PCE reading rather than the more commonly cited consumer price index (CPI), which the Labor Department compiles. The Commerce Department’s PCE index accounts for changes in consumer behavior such as substituting expensive items for less costly alternatives, and has a wider scope than the CPI.

The core reading represents something of a plateau, with annual inflation hovering around the high 2% region for five months, leaving the Fed to stuck in a holding pattern, waiting for a clearer sign that inflation is trending toward the central bank’s 2% target. 

A 1.2% rise in energy prices helped push up the headline increase, while consumers got some relief at the grocery store, with food prices posting a 0.2% decline on the month.

A separate Commerce Department report on income and spending found muted consumer spending, which grew just 0.2% for the month. That’s below the 0.4% that economists had expected and a dramatic slowdown from March’s downwardly revised 0.7% gain. Adjusted for inflation, spending showed a 0.1% decline.

Markets have reined in their expectations for rate reductions this year as inflation proved persistent. Signals from the bond market show a growing sentiment that we may not see interest rate cuts until November.

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