When the Bureau of Economic Analysis on Friday reports April income and spending data, investors will get a look at the Federal Reserve’s favorite inflation metric.
The core personal consumption expenditure index deflator is the metric the central bank uses to guide policy decisions. The gauge, which excludes food and energy, tends to run about a half-percentage point below the consumer price index.
Economists polled by FactSet expect the core PCE to have risen 4.9% in April from a year earlier, down from an 5.2% clip in March and the slowest pace this year. That is largely because of the so-called base effect, where high year-ago numbers fall out of the calculation, and because of legislated cuts in Medicare payments to medical-services providers, which have weighed on medical-services prices.
A slowdown in consumer price inflation will be welcome, but markets and policy makers will be more interested in the details of the month-to-month print, says Ian Shepherdson, chief economist at Pantheon Macroeconomics.
From a month earlier, economists expect a 0.3% rise in the core PCE. That would be half the 0.6% core CPI reading reported a couple weeks ago, Shepherdson notes. The much smaller weighting of rent in the PCE and differing treatment of airline fares in the two measures explain much of the difference, he says.
Including food and energy, the PCE is expected to have risen 0.3% from a month earlier and 6.3% from a year earlier.
Omair Sharif, president of Inflation Insights, predicts the core PCE in April will have slowed a bit more than the consensus anticipates. He sees a 0.2% increase from a month earlier, but cautions against reading too much into a lower-than-expected reading.
“I think you want to be very careful in interpreting that moderation as indicative of a slowdown in inflation,” given that it’s driven by volatile imputed—or approximated—prices and a different measure of airfares than in the core CPI, he says.
Sharif also warns that there are swing factors at play in the latest data, including uncertainty around the BEA’s seasonal factors for used autos and trucks, meaning investors should brace for a surprise in either direction.
