Fed’s favorite inflation gauge is expected to show very slow progress on Friday

Inflation is taking baby steps towards coming back to where policymakers want it, with a report due Friday expected to show more of that creeping progress.

The Commerce Department’s measure of personal consumption expenditures prices is expected to show inflation in April running at a 2.7% annual rate, according to the Dow Jones estimates both for overall inflation and the “core” that excludes food and energy costs.

If that forecast holds, it will represent a slight decline on the core measure and little change on the overall rate, though economists will be looking at both the annual and monthly measures. Core inflation is expected to have slowed to 0.2%, which would represent at least some further progress toward easing price pressure on weary consumers.

Overall, the report, due at 8:30 a.m. ET, likely will point to another incremental move back to the Federal Reserve’s 2% target.

“We do not expect any major upward or downward surprises in Friday’s PCE as most of the recent economic data is indicative of an economy that has settled into a nice long-term simmer of not too hot and not too cold,” said Carol Schleif, chief investment officer at BMO Family Office. “That said, getting to the Fed’s 2% target is apt to be a bumpy landing.”

Getting a handle on inflation is proving tricky these days.

The Fed parses the data in many ways, most recently introducing what has been known as the “super-core” level that looks at services costs 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 thwarted, throwing another wrinkle into the debate.

Moreover, the Fed’s preference on PCE is a bit arcane, as the public focuses more on the Labor Department’s consumer price index, which has shown much higher trends. CPI inflation ran at 3.4% for the all-items measure in April and 3.6% for core, well above the Fed’s target.

The Fed prefers the PCE measure as it accounts for shifts in consumer behavior, such as when shoppers will substitute less-expensive items for pricier ones. The theory is that the methodology provides a better look at the actual cost of living rather than just absolute prices. Fed officials particularly focus on core as it serves as a better longer-term indicator.

The Commerce Department delivered some good news Thursday — again, in modest terms — when it reported that PCE for the first quarter rose 3.3% on headline and 3.6% on core, both 0.1 percentage point lower than the initial estimate. Similarly, the “chain-weighted” price index was at 3%, also 0.1 percentage point below the first print.

However, those numbers are still a good deal from the Fed’s target. Markets have been sensitive to inflation movements, particularly as how they reflect on the central bank’s intentions with interest rates. Current expectations are for just one rate cut this year, likely in November, according to the CME Group’s FedWatch measure of futures pricing.

“Economists are optimistically expecting a lower monthly read in this report than the CPI, and any disappointment may lead markets to consider further the prospects for any cuts in 2024,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.

New York Fed President John Williams, part of the leadership troika at the central bank that also includes Chair Jerome Powell and Vice Chair Philip Jefferson, said Thursday he expects PCE inflation to keep nudging lower, down to about 2.5% by the end of the year before eventually hitting 2% in 2026.

“We’ve got lot of dynamic supply and increasing productivity in the economy. So that’s how I know what’s happening,” Williams said. “It’s always a big question mark how that will evolve in the future.”