People shop at a supermarket in Montebello, California on May 15, 2024.
Frederick J. Brown | AFP | Getty Images
Inflation has been taking small steps toward returning to levels policymakers would like, and a report released on Friday is expected to show more of that slow progress.
Dow Jones estimates that the Commerce Department’s personal consumption expenditures price index, both the overall inflation rate and “core” inflation, which excludes food and energy costs, is expected to show inflation at an annualized rate of 2.7 percent in April.
If that forecast proves correct, the core measure would fall slightly and the overall rate would be little changed, but economists will be keeping a close eye on both the annual and monthly readings. Core inflation is expected to slow to 0.2%, which would at least signal further progress toward easing price pressures for strained consumers.
Overall, the report, due to be released at 8:30 a.m. ET, is likely to signal a further gradual return to the Fed’s 2% target.
“Most of the recent economic data suggests the economy is neither too hot nor too cold and is in good shape for the long term, so we don’t expect any big upside or downside surprises in the PCE index on Friday,” said Carol Schleif, chief investment officer at BMO Family Office. “That said, reaching the Fed’s 2% target is shaping up to be a tough landing.”
Inflation has proven difficult to control in recent times.
The Fed analyzes the data in a variety of ways and recently introduced what it calls “supercore” levels, which look at the costs of services excluding food, energy and housing, as a way to gauge longer-term trends.
But policymakers’ expectations that housing inflation would moderate this year have been badly undermined, posing new challenges to the debate.
Moreover, the Fed’s prioritization of PCE is a bit puzzling, since the public is focused on the Labor Department’s Consumer Price Index, which tends to be much higher: CPI inflation came in at 3.4% for the headline and 3.6% for the core index in April, well above the Fed’s target.
How many cuts will you make this year?
The Fed likes the PCE measure because it takes into account changes in consumer behavior, such as when people substitute cheaper items for more expensive ones. The theory is that the approach gives a more accurate picture of the real cost of living than just absolute prices. Fed officials are particularly interested in the core measure because it’s a better long-term indicator.
The Commerce Department on Thursday also provided some good news, though more muted, by reporting that its index of personal consumer goods expenditures rose 3.3% overall and 3.6% core in the first quarter, both 0.1 percentage points lower than initially expected. Similarly, the “chain-weighted” price index rose 3%, also 0.1 percentage points lower than initially expected.
But those numbers are still quite far from the Fed’s target. Markets are sensitive to inflation trends, especially how they translate into the central bank’s interest rate policy intentions. Current projections call for just one rate cut this year, likely in November, according to CME Group’s futures price index, FedWatch.
“Economists are optimistic that the monthly reading in this report will be lower than the CPI, and disappointment could lead markets to further consider the possibility of a rate cut in 2024,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.
New York Fed President John Williams, part of the central bank’s leadership troika along with Chairman Jerome Powell and Vice Chairman Philip Jefferson, said Thursday he expects PCE inflation to continue to decline slowly, to about 2.5% by the end of the year and eventually to reach 2% in 2026.
“The economy is supply-heavy and productivity is rising, so we know what’s going on,” Williams said. “How it will develop going forward is always the big question.”
