What PCE Inflation Data Means for Interest Rates

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The much-anticipated Personal Consumption Expenditures (PCE) index was released Friday, and the results were exactly as anticipated by economists.

The PCE, which is the preferred inflation gauge for the Federal Reserve in determining interest rates, rose 2.7% year over year in April. That was flat with March’s increase and in line with economists’ predictions.

The month-over-month increase in April was 0.3%, also unchanged from the previous month and in line with expectations.

Good news on key inflation measure

While the broader inflation rates remained unchanged in April, there was one key measure within the PCE Index that dropped last month.

The PCE excluding food and energy prices only rose 0.2% month over month in April, down from 0.3% the previous month. In fact, the 0.2% increase is the lowest since December. That said, food prices actually decreased 0.2% while energy prices increased 1.2% for the month.

The real PCE, which focuses on how much is spent on goods and services, decreased 0.1% in April, with prices for goods dropping 0.4% and prices for services rising 0.1%.

Within goods, the biggest declines were seen in gasoline and other energy goods, including motor vehicle fuels, lubricants, and fluids; recreational goods and vehicles; and other non-durable goods. Within services, the largest increase was in health care.

The report from the Bureau of Economic Analysis also revealed that disposable income increased 0.2% in April, down from 0.5% in March. The personal savings rate also remained unchanged from March at 3.6%.

What this all means for interest rates and markets

As stated, the PCE is the key inflation gauge that the Federal Open Market Committee (FOMC) uses to determine the path of interest rates, among other metrics. Thus, this data has broader implications for the economy and the markets.

With the overall PCE staying the same, inflation as measured by the PCE excluding food and energy slowing, and the real PCE declining, this report has to be viewed as a net positive for those hoping the Fed moves on rates sooner rather than later.

New York Fed President John Williams, who sits on the FOMC, provided some further hope, speaking at an event on Thursday in New York.

“With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year,” Williams said.

He also expects the PCE inflation rate to move to 2.5% this year before approaching the Fed’s 2% goal in 2025.

“In terms of my forecast for the economy, I expect GDP growth this year to be between 2% and 2.5%. I expect the unemployment rate to be about 4% at the end of this year, and then move gradually down to its longer-run level of 3.75% thereafter. As the growth of economic activity gradually slows and demand and supply continue to come into better balance, I expect overall PCE inflation to moderate to about 2.5% this year, before moving closer to 2% next year,” Williams said.

The markets were mixed on Friday morning, with the S&P 500, Dow Jones Industrial Average, and Russell 2000 up slightly and the Nasdaq down slightly.