Some relief from US core inflation matching expectations in April

The Fed is sidelined on rates for some time as it watches how inflation evolves after an unexpected surge in Q1.
Kieran Davies

Coolabah Capital

After a run of bad news on the inflation front, the Fed’s preferred measure of underlying inflation – the core PCE deflator – matched both market and Fed staff expectations in April, increasing by 0.25% (rounding down to 0.2%), which followed increases of 0.5% in January and 0.3% in both February and March, with annual inflation steady at 2.8% for the third month in a row.

Fed officials would likely be happy with the result, particularly when narrower measures of underlying inflation, such as the market prices version of the core PCE and the trimmed mean PCE series, were marginally below the core PCE index in April, while high services inflation, which drove the upside surprise to inflation in Q1, looks to be broadly peaking.

The Fed has indicated that it will be sidelined for some time as it watches how inflation evolves, which suggests that the FOMC will reassess the outlook for rates later in the year, awkwardly placing it near the presidential election, where candidate Trump has been openly hostile towards the Fed and has sought to oust Fed Chair Powell.

  • The core PCE deflator rose by 0.25% in April, which was the smallest rise this year. The trend estimate of the core PCE – which can be revised as more data become available – is increasing at an annualised monthly rate of 4%, although this will quickly ease towards 3% if the core PCE grows at a similar rate to April over the rest of Q2.

  • The market prices version of the core PCE deflator has recently been growing at a marginally slower rate than the core PCE series, up 0.2% in April and 2.5% over the year. The trend measures of this series saw annualised monthly growth rose from 2% last year to 3% in January, holding steady at that rate of subsequent months.

  • The trimmed mean PCE deflator has also recently been growing at a marginally slower rate than the core PCE series, up 0.2% in April and 2.9% over the year. Estimated trend annualised monthly inflation in this series rose from 2½% last year to about 3½% in March, holding at that rate in April.

  • Interestingly, after falling through most of the second half of last year and the start of this year, core goods prices have edged higher over the past few months, up another 0.1% in April. For the trend estimate of core goods prices, this has seen a turnaround from annualised monthly disinflation of 2¼% to annualised monthly inflation of 1¾%.

  • Core services prices rose by 0.3% in April, having increased by 0.7% in January, 0.3% in February and 0.4% in March, with annual inflation steady at around 4% for most of this year. The trend estimate of core services prices has seen annualised monthly inflation pick up from a low of 3¼% in 2023 to 4¾%, holding at that high rate for the past few months. 
US core inflation matched expectations in Apri
US core inflation matched expectations in April


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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...

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