People shop at a supermarket in Montebello, California on May 15, 2024.
Frederic J. Brown | AFP | Getty Images
Inflation is only taking baby steps to get back to where policymakers want it to be. A report due out Friday is expected to show more of that gradual progress.
The Commerce Department’s measure of consumer spending prices is expected to show an annual inflation rate of 2.7% in April, for both headline inflation and the “core” that excludes food and energy costs. This is evident from the Dow Jones estimates.
If that forecast holds true, it will mean a slight decline in the core measure and a small change in the overall rate, although economists will consider both annual and monthly measures. Core inflation is expected to have slowed to 0.2%, which would at least represent further progress in easing price pressures on weary consumers.
Overall, the report, due at 8:30 a.m. ET, likely suggests another gradual return to the Federal Reserve’s 2% target.
“We don’t expect any major surprises up or down in the PCE on Friday as most of the recent economic data points to an economy that has settled into a comfortable state of not too hot and not too cold over the long term,” Carol said Schleif, chief investment officer at BMO Family Office. “Still, achieving the Fed’s 2 percent target is likely to be a bumpy landing.”
Inflation is proving difficult to control these days.
The Fed evaluates the data in a variety of ways. Most recently, it introduced the so-called “super-core” level, which looks at the cost of services excluding food, energy and housing as a way to measure longer-term trends.
However, policymakers’ expectations that housing inflation will cool this year have been largely dashed, again adding uncertainty to the debate.
Additionally, the Fed’s preference for PCE is somewhat mysterious as the public is more focused on the Labor Department’s Consumer Price Index, which is trending significantly higher. CPI inflation was 3.4% for all items and 3.6% for core markets in April, well above the Fed’s target.
How many cuts this year?
The Fed favors the PCE measure because it takes into account changes in consumer behavior, such as shoppers replacing more expensive items with cheaper items. The theory is that the methodology provides greater insight into the true cost of living rather than just absolute prices. Fed officials are particularly focused on core bonds because they serve as a better longer-term indicator.
The Commerce Department delivered some good news on Thursday – again in modest numbers – when it reported that PCE rose 3.3% overall and 3.6% core in the first quarter, both down 0.1 percentage points from the original Estimate. Likewise, the “chain-weighted” price index was 3%, also 0.1 percentage points below the first print.
However, these numbers are still well below the Fed’s target. Markets have been sensitive to inflation movements, particularly the way they reflect the central bank’s interest rate intentions. According to CME Group’s FedWatch measure of futures prices, only one rate cut is currently expected this year, probably in November.
“Economists are optimistic that this report is expected to show a lower monthly reading than the consumer price index, and any disappointment could cause markets to further consider the prospects for any cuts in 2024,” said Matthew Ryan, head of the Market strategy at global financial services company Ebury.
New York Fed President John Williams, part of the central bank’s leadership troika that also includes Chairman Jerome Powell and Vice Chairman Philip Jefferson, said on Thursday he expects PCE inflation to fall further by the end of the year and to about It will fall by 2.5% before finally reaching 2% in 2026.
“We have a dynamic supply and increasing productivity in the economy. That’s why I know what’s happening,” Williams said. “It is always a big question mark as to how this will develop in the future.”
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2024-05-30 18:58:24
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