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.”