The Fed’s preferred inflation measure rose 0.2% in April, as expected

Inflation saw a modest increase in April, aligning with market expectations and leaving investors on edge regarding potential shifts in interest rates. The personal consumption expenditures (PCE) price index, excluding food and energy costs, rose by 0.2% during the period, in line with the Dow Jones estimate as reported by the Commerce Department. On an annual basis, core PCE experienced a 2.8% uptick, slightly surpassing initial forecasts by 0.1 percentage points. When factoring in the volatile food and energy category, PCE inflation stood at 2.7% annually, with a 0.3% monthly increase, mirroring earlier predictions.

Fed officials closely monitor the PCE reading compared to the Consumer Price Index (CPI) due to its broader scope and ability to accommodate changes in consumer behavior. Dan North, senior economist for North America at Allianz Trade, noted that while the core index remained at 2.8%, it has shown limited fluctuation over the past five months. North expressed a desire for a downward trend, emphasizing the importance of sustained progress in managing inflation levels.

Energy prices surged by 1.2%, contributing to the overall inflation uptick, while food prices experienced a minor 0.2% decrease for the month. The rise in goods prices by 0.2% and services by 0.3% signals a normalization trend in an economy where services and consumption play a pivotal role.

Accompanying the inflation data release were figures on income and spending, revealing a 0.3% increase in personal income and a 0.2% rise in spending. However, adjusted for inflation, spending exhibited a 0.1% decline due to reduced expenditures on goods and marginal growth in services spending.

The market response to the data unveiled a positive sentiment, with futures linked to major stock averages climbing and Treasury yields receding. Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley, noted that while the PCE Price Index showed limited inflation progress, it also avoided regression, prompting a favorable market reaction. Larkin cautioned investors to remain patient, emphasizing the Fed’s stance on requiring sustained favorable data before considering rate adjustments.

As inflation levels surpass initial estimates, central bank officials advocate for a cautious approach, indicating a reduced likelihood of imminent rate cuts. New York Fed President John Williams echoed this sentiment, highlighting the ongoing challenge of achieving the Fed’s 2% annual inflation target. Market expectations have shifted, with the probability of rate reductions potentially delayed until November, following the Fed’s meeting post the presidential election.