Evelyn Reynolds

The personal consumption expenditures price index excluding food and energy costs increased 0.2% in April and 2.8% from a year ago.
Headline PCE rose 0.3% and 2.7% respectively, in line with estimates.
Personal income increased 0.3% on the month, matching the estimate, while spending rose just 0.2%.

Inflation rose about as expected in April, with markets on edge over when interest rates might start coming down, according to a measure released Friday that is followed closely by the Federal Reserve.
The personal consumption expenditures price index excluding food and energy costs increased just 0.2% for the period, in line with the Dow Jones estimate, the Commerce Department reported.

On annual basis, core PCE was up 2.8%, or 0.1 percentage point higher than the estimate.
Including the volatile food and energy category, PCE inflation was at 2.7% on an annual basis and 0.3% from a month ago. Those numbers were in line with forecasts.
Fed officials prefer the PCE reading over the more closely followed consumer price index, which the Labor Department compiles. The Commerce Department measure accounts for changes in consumer behavior such as substituting less expensive items for costlier alternatives, and has a wider scope than CPI.
“The core index came in at 2.8%. That’s fine, but it’s been trading in a range for five months now, and that’s pretty sticky to me,” said Dan North, senior economist for North America at Allianz Trade. “If I’m [Fed Chair Jerome] Powell, I’d like to see that start moving down, and it’s barely creeping. … I’m not reaching for the Pepto yet, but I’m not feeling great. This is not what you want to see.”
A 1.2% increase in energy prices helped push up the headline increase. Food prices posted a 0.2% decline on the month.

Goods prices rose 0.2% while services saw a 0.3% increase, continuing a normalization trend for an economy in which services and consumption provide much of the fuel.
Along with the inflation reading, Friday’s release included data about income and spending.
Personal income increased 0.3% on the month, matching the estimate, while spending rose just 0.2%, below the 0.4% estimate and off March’s downwardly revised 0.7%. Adjusted for inflation, the spending numbers showed a 0.1% decline, due in large part to a 0.4% decrease in spending on goods and just a 0.1% rise in services expenditures.
Market reaction following the release saw futures tied to major stock averages rising while Treasury yields moved lower.
“The PCE Price Index didn’t show much progress on inflation, but it didn’t show any backsliding, either. Based on the initial reaction in stock index futures, the market will see it mostly as a positive,” said Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley.
“Investors will have to remain patient, though,” he added. “The Fed has suggested it will take more than one month of favorable data to confirm inflation is reliably moving lower again, so there’s still no reason to think a first rate cut will come any earlier than September.”
As inflation data has come in hotter than expected, central bank officials have encouraged a cautious approach. That means less likelihood that they will be cutting rates anytime soon.
Most recently, New York Fed President John Williams said Thursday that while he is confident inflation will continue to recede, prices are still too high and he has not seen sufficient progress on moving to the Fed’s 2% annual goal.
Markets have reined in their expectations for rate reductions this year. Pricing Friday morning indicated a probability that the first move likely won’t come until November, at the Fed’s meeting that concludes two days after the presidential election. More

Euro zone inflation increased to 2.6% in May from 2.4% in April, according to a flash reading from the European Union’s statistics agency.
Headline and core inflation both came in higher than economists expected, but markets continued to fully price in an interest rate cut at the European Central Bank’s June meeting, following weeks of strong signalling from policymakers.
Services inflation, a key metric for the ECB, rose to 4.1% from 3.7%.

General view of the center of Corfu with a little restaurant in Old Town in Corfu, Greece, in May 2024.
Sopa Images | Lightrocket | Getty Images

Inflation in the euro zone rose to 2.6% in May, statistics agency Eurostat said Friday, but a higher-than-expected print did not sway market bets of an interest rate cut from the European Central Bank next week.
Economists polled by Reuters had forecast a 0.1 percentage point increase from April’s headline figure of 2.4%.

Core inflation, excluding the volatile effects of energy, food, alcohol and tobacco, increased to 2.9% from 2.7% in April. A Reuters poll of economists had projected a flat reading.
The data comes with the ECB widely expected to cut interest rates at its June 6 meeting, the first reduction since 2019. The central bank for the 20-nation euro area began its latest hiking cycle in July 2022, hauling rates out of negative territory to 4% at present.
Any deviation from a 25 basis point cut at the ECB’s June meeting would be a major shock to markets, following weeks of strong signalling from policymakers.
In the wake of the reading, money markets continued to fully price in a June cut, followed by just one more reduction in 2024.
While headline inflation increased in May, fluctuations in the rate have been forecast over the coming months due to base effects from the energy market and the unwinding of government fiscal support schemes across the bloc, .

Overall, the headline figure has cooled significantly from a peak of 10.6% in October 2022, languishing below 3% for the past eight straight months.
However, ECB members may pay greater attention to the rate of services inflation — a key indicator of domestic inflationary pressures — which rose to 4.1% from 3.7%.
Staff are also due to release their latest round of inflation and growth projections at next week’s meeting, providing more clues on the pace and level of potential cuts this year.
ECB voting member Klaas Knot said earlier this week that the next phase of disinflation would be “more volatile,” and that monetary policy would need to be eased slowly and gradually to avoid inflation expectations de-anchoring from forecasts.
Kamil Kovar, senior economist at Moody’s Analytics, said in a note on Friday that the inflation print was likely “the last small bump in the disinflationary road rather than the beginning of any arduous last mile.”
He added, “Still, hopes for a July cut are buried very deep now, and based solely on data from recent weeks the ECB would not be cutting in June either. If rates are lowered in June this would be due to the building of momentum for a cut throughout the last nine months.”
The euro was slightly higher against the U.S. dollar and British pound at 11:30 a.m. in London, holding on to gains from earlier in the session. More

The Commerce Department’s measure of personal consumption expenditures prices will be released Friday morning and is expected to show inflation in April running at a 2.7% annual rate, according to Dow Jones.
Fed policymakers prefer the PCE measure as it accounts for shifts in consumer behavior, such as when shoppers will substitute less-expensive items for pricier ones.

People shop at a supermarket in Montebello, California, on May 15, 2024. 
Frederic J. Brown | AFP | Getty Images

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.

How many cuts this year?

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.” More