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April PCE Index Forecasts Show Inflation Remaining Sticky

Investors shouldn’t hold their breath for rate cuts, analysts say.

Illustration of the Federal Reserve with currency bubbles, depicting inflation

The April Personal Consumption Expenditures Price Index is forecast to show that the Federal Reserve’s preferred measure of inflation remained sticky last month, which could delay rate cuts even further in 2024.

Economists expect the overall PCE Price Index to rise 2.7% on an annual basis in April, the same rate of inflation as seen in March, according to FactSet’s consensus estimates. Forecasts call for a 0.3% month-over-month increase, down only slightly from 0.32% in March.

A similar trend is predicted for the core measure of PCE, which excludes volatile food and energy prices. The consensus is for a 2.8% rise in the annual rate, which would be in line with March’s reading, and a 0.30% increase in the monthly rate, slightly lower than March’s 0.32%.

“I don’t expect earth-shattering changes,” says Scott Anderson, chief US economist at BMO Capital Markets. He’s anticipating some modest improvement in the core measure, from 0.3% to 0.2% on the month, but says that won’t be enough to get the Fed off the sidelines.

“They’re still going to be in wait-and-see mode as they try to gauge whether monetary policy is restrictive enough to bring those PCE measures down to the 2% target,” he says.

PCE vs Core PCE

April PCE Report Forecast Highlights

  • PCE report release date and time: Friday, May 31 at 8:30 a.m. EDT.
  • The PCE Price Index is forecast to rise 0.30% in April after rising by 0.32% in March.
  • Core PCE is forecast to rise 0.30% in April after rising by 0.32% in March.
  • The PCE Price Index year over year is forecast to rise to 2.7% in April after increasing the same amount in March.
  • Core PCE year over year is forecast to rise 2.8% in April after increasing the same amount in February.

Inflation Progress Slows

While price pressures have improved dramatically over the past year, progress has slowed significantly. Investors began 2024 looking ahead to six cuts from the central bank, but stubborn inflation has reduced those expectations to just one or two cuts before the end of the year.

April Consumer Price Index data—another mainstream measure of inflation that tends to overshadow the PCE Index—came in line with expectations this month, offering markets a sigh of relief that price pressures didn’t get worse. But analysts agree that we’re not out of the woods yet. “I don’t think [April’s data] gave us a definitive answer that inflation pressures should not be a concern,” says Blerina Uruçi, chief US economist at T. Rowe Price.

“We are a little bit stuck in this last-mile inflation problem,” adds Roger Aliaga-Díaz, global head of portfolio construction and chief economist, Americas at Vanguard. The supply side drivers of major inflation improvement have faded, he says. At the same time, a surge in productivity is expected to moderate. Without those headwinds, inflation won’t improve as quickly in 2024 as it did last year.

Uruçi points to base effects as another reason the Fed may feel reluctant to cut. Progress on inflation was so fast last year that this year’s modest improvements will seem even slower in comparison.

“It’s very possible that even with benign prints on inflation, the trajectory is going to look pretty sticky,” she says. That could make the central bank more reluctant to loosen policy.

PCE Inflation Fed by Housing and Energy

Many of the components of the PCE Index are drawn from the same data used in the CPI. That means the categories keeping CPI elevated—like rising housing costs and energy costs—are also responsible for elevated PCE readings.

Rising shelter costs have been a major contributor to high inflation for the past year, and although analysts had been expecting those pressures to moderate, major improvement hasn’t yet appeared in the data. That’s critical, says Vanguard’s Aliaga-Díaz. Setting aside shelter costs, “the rest of the index is much closer to the Fed’s target.”

Deflation in the goods sector, on the other hand, has helped push inflation lower overall. T Rowe Price’s Uruçi expects continued deflation on the durables side of the goods equation—like cars and furniture—while progress slows on the nondurables side—like food and household products—thanks to rising commodity prices and input costs.

BMO’s Anderson points out that because of differences in the methodologies of the two indexes, rising car, medical, and homeowners insurance prices are having a larger impact on PCE inflation compared with CPI inflation.

When Will the Fed Cut Rates?

With progress on inflation slowing to a crawl, investors should prepare for the possibility that rate cuts are delayed even further this year. “I don’t see any real relief there at all,” says BMO’s Anderson, who expects PCE inflation to remain roughly at today’s levels through the end of the year. “The Fed is going to be waiting this one out for a while.”

Bond investors see a roughly 20% chance that the Fed will keep interest rates steady at its December meeting, and a 42% chance that it will cut just once, according to the CME FedWatch tool.

Federal-Funds Rate Target Expectations for June 12, 2024 Meeting

That’s now at odds with the Fed’s most recent projections: Back in March, the median FOMC member was expecting to cut rates three times over the course of 2024. New projections released in June will shed light on whether central bankers’ expectations have changed over the last few months.

A September cut is also looking unlikely, according to Uruçi. “My view is that we are not going to see enough convincing evidence that inflation and the economy are cooling enough to warrant a cut by September,” she says.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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