Fed's favorite inflation gauge is expected to show very slow progress on Friday

Anticipated Slow Progress in Fed's Preferred Inflation Gauge

Key Subheadings:

Expected PCE Inflation Rate
The Commerce Department's report is projected to show a 2.7% annual inflation rate for April, signaling a gradual move towards the Federal Reserve's 2% target.

Core vs. Overall Inflation
Core inflation, which excludes volatile food and energy prices, is anticipated to slow down to 0.2%, indicating some easing in price pressures.

Fed's Inflation Measurement Preference
The Fed favors the PCE index over the CPI due to its consideration of changes in consumer spending behavior, offering a more accurate reflection of living costs.

Market Sensitivity and Rate Cuts
With inflation still above target, market reactions are closely tied to the Fed's interest rate decisions, with expectations leaning towards a potential rate cut later in the year.

Federal Reserve policymakers prefer the Personal Consumption Expenditures (PCE) measure over other inflation metrics primarily because of its ability to account for changes in consumer behavior, specifically the substitution of less expensive items for pricier ones145. This substitution effect is a key factor in the PCE's methodology, which aims to provide a more accurate reflection of the actual cost of living rather than just tracking absolute price changes. This characteristic makes the PCE a preferred tool for the Fed, especially when analyzing core inflation, which excludes the volatile categories of food and energy and serves as a better indicator of long-term inflation trends. Additionally, the PCE measure adjusts more dynamically to what consumers are actually buying, enhancing its relevance and utility in monetary policy decision-making.