Inflation Ticks Up by Fed’s Favored Gauge

Inflation Illustration | Image by Deemerwha studio, Shutterstock

The United States Personal Consumption Expenditure (PCE) Price Index rose to 4.4% annually in April, despite predictions that it would drop to 3.9%.

The reading measures prices people in the U.S. — or those purchasing on their behalf — pay for goods and services. It is also the favored inflation gauge used by the Federal Reserve, per the Washington Examiner.

Core PCE, which does not include energy and food prices, logged an even higher 4.7% annual rate in April.

The rise comes amid more than a year of interest rate tightening by the central bank to suppress historically high inflation. The higher-than-expected result may mean the Fed needs to apply even greater economic pressure through further tightening.

Ryan Sweet, chief U.S. economist at Oxford Economics, said, “We will be sticking with the forecast for the Fed to keep rates unchanged through the remainder [of] this year,” per the Washington Examiner.

“However,” said Sweet, “odds are rising that we will be altering the forecast for the fed funds rate in 2024, reducing the number of rate cuts.” In other words, they believe rates may need to remain higher for longer.

Some inflation measures have shown prices softening. In April, the consumer price index fell to 4.9%, the lowest level since May 2021, while in March, the producer price index dropped to 2.3%, the lowest level in over two years.

Regardless, the latest PCE results will reignite concerns that the Federal Reserve’s tightening campaign remains unfinished.

Since March 2022, the central bank has increased rates by 5% over 10 meetings, resulting in the most aggressive tightening in four decades.

PNC Chief Economist Gus Faucher said, “Stubbornly high inflation, particularly core inflation, may lead the FOMC to raise the federal funds rate again at their meeting on June 13 and 14,” per the Washington Examiner.

This, despite minutes from the May meeting suggesting “that the committee could keep the fed funds rate in its current range of 5.00% to 5.25% in June,” said Faucher.

As of May 26, roughly two-thirds of interest rate traders in the market are pricing in the likelihood of another 25 basis point hike at the next Federal Reserve meeting in June.

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