April PCE Inflation: Is It a Signal of Disinflation?

Watching Fed on 31st with PCE Inflation Release
Key to Whether Inflation Rate Slows After April CPI
US Q1 GDP Revised Figures Released on 30th

This week, the U.S. Federal Reserve (Fed) will release the Personal Consumption Expenditures (PCE) price index, the inflation indicator it values most. Attention is focused on whether the inflation slowdown observed last month in the Consumer Price Index (CPI) will also be confirmed in the PCE price index.

According to the U.S. Department of Commerce on the 26th (local time), the April PCE price index will be announced on the 31st.

The core PCE price index, which excludes volatile food and energy prices to show the underlying trend of inflation, is expected to have risen by 0.2% month-on-month last month. This would not only be a slowdown compared to March's 0.3% increase but also the smallest monthly rise so far this year. On a year-on-year basis, it is expected to increase by 2.8%, the same level as the previous month (2.8%).

The headline PCE price index is forecast to rise 0.3% month-on-month and 2.7% year-on-year, maintaining the same level as last month.

If the inflation slowdown trend is confirmed in the PCE price index following the April CPI deceleration, market expectations for a Fed monetary policy shift are likely to revive. The previously released April core CPI rose 0.3% month-on-month and 3.6% year-on-year, with the annual increase falling to its lowest level in three years since April 2021.

Anna Wong, an economist at Bloomberg Economics (BE), commented on the April PCE prices, saying, "The report is likely to send an encouraging signal that the disinflation process has not completely stopped," adding, "As the labor market cools and income growth slows, consumers are gradually showing cracks, which will provide sustained disinflationary pressure for the remainder of this year." However, she also noted, "Price pressures remain, so inflation is likely to ease very gradually this year."

The market is betting on one or two interest rate cuts this year. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently reflects over a 61% probability that the Fed will cut rates by at least 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting in November. The probability of a rate cut of 0.25% or more in December is priced at around 81%.

This week, the revised U.S. first-quarter Gross Domestic Product (GDP) will also be released on the 30th. The market expects the first-quarter growth rate to be 1.3% annualized year-on-year, lower than the preliminary estimate of 1.6%. On the day before, the 29th, the Fed's Beige Book, a report on economic conditions, will be published.

Additionally, speeches by key Fed officials are scheduled, including John Williams, President of the Federal Reserve Bank of New York; Lisa Cook, Fed Board member; Neel Kashkari, President of the Minneapolis Fed; and Lori Logan, President of the Dallas Fed.