Details from April’s consumer price index and producer price index reports this week implied a slightly softer month for the personal consumption expenditures index.
We think the top-line PCE inflation will most likely come in at 0.25% for April, down from 0.30% in March, while the core index will slow to 0.26% from 0.30%.
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While that will not matter much for the 12-month inflation numbers, the slowdown should be encouraging, adding reasons to think that the rebound in the first quarter was more about seasonal noise than a long-term trend.
As a result, the three-month annualized pace for both overall and core PCE inflation will move down to 3.7% and 3.4%, respectively, from 4.4% in March for both numbers.
The PCE data is more significant than other inflation measures because it is the Federal Reserve’s preferred measure and influences its decisions on interest rates. Both PPI and CPI are helpful mostly as leading indicators for PCE.
Unlike the other two inflation metrics, annual PCE has been running between 2.5% and 3% for the six months before April and will most likely stay between that range in April.
Although that is higher than the Fed’s 2% long-term target, we think it is manageable without sacrificing employment growth.
We have long argued that in the post-pandemic era, the Fed’s inflation target should be higher than before. The Fed’s determination to bring inflation down to 2% reflects the difference between what we think the Fed should do versus what it is likely to do.
