By Paul Gomme and Peter Rupert
The BEA has released PCE (personal consumption expenditure) price data for April. By all measures we look at, this measure of inflation is down. While the annualized monthly core PCE inflation rate dropped from 4.08% to 3.03%, our measure of trend only fell by 0.17 percentage points, from 3.53% to 3.35%. The reduction in our trend core PCE inflation is in line with that reported earlier for the April trend core CPI inflation rate (a drop of 0.2 percentage points). While the year-over-year core PCE inflation rate continues to fall, and run below these other measures of inflation, we anticipate that the year-over-year rate will start rising as the favorable monthly inflation rates in mid-2023 fall out of the calculation of the annual inflation rate.
The picture is largely similar for overall PCE inflation: a large drop for the month-over-month rate and more modest declines for the year-over-year and our trend measures.
The rapid increase in the Fed Funds rate from mid 2022 to mid 2023 and the decline in inflation now has the Fed Funds rate higher than the inflation rate and, more often than not, tends to keep inflation at bay. Note that after the Great Recession the inflation rate was above the Fed Funds rate longer than at any time since the 1960’s.
Earlier, the BEA released its second estimate of GDP for the first quarter of 2024. Output growth for that quarter was revised down slightly from 1.6% to 1.3%.
In the perverse world of monetary policy, slowing GDP growth is considered good news in the sense that so-called inflationary pressures are thought to be easing. Nonetheless (core) PCE inflation is still running above the Fed’s 2% target. Interest rate cuts appear to be some time off in the future.
