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April PCE of 2.7% – Consistent with Expectations

This morning, we got the April Personal Consumption Expenditures (PCE) report. This is the preferred inflation gauge of the Federal Reserve. The PCE was up 0.3% vs last month and 2.7% vs last year. This was the same as last month and consistent with expectations. The Core PCE, which excludes food and energy, was up 0.2% vs last month and 2.8% vs last year. This was also consistent with expectations. While I generally prefer the annual comparisons, the market has recently been more focused on the m/m increase. That 0.3% monthly increase annualizes to 3.7%. The annual numbers reflected in the chart below show sticky inflation which is has stopped subsiding.

This report shows a continuation of prior trends with continued inflation and rising income. Personal income was up 0.3% in the month which fell behind last month’s 0.5% growth. Spending was up, but by a much smaller amount. The prior two months had shown monthly spending increases of 0.8% which were revised down to 0.7%. April’s spending increase was only 0.2%. Last month, spending increases were greater than pricing increases, and we concluded that consumers were spending more and also buying more. This month income matched price increases and, spending was up less than income. Consistent with Target’s ($TGT) weak revenue last week and this week’s weak guidance from Best Buy ($BBY), it seems consumers are tightening their belts and keeping spending below income increases (for now).

It’s worth pointing out that the government is still engaging in massive fiscal stimulus. For the people still insisting Americans should be more grateful for disinflation (a reduction in the rate of inflation), the following chart explains the reason so many are still irritated and worried about price increases.

There’s already debate in the market and on Twitter/X about what this report means. Some are claiming the as-expected PCE report means we can expect rate cuts soon. Consistent with that point of view, pre-market indexes turned from negative to positive this morning following the release of the report. Others are arguing that we’re seeing sticky inflation that is not subsiding and that the monthly number still annualizes to something close to double the Fed’s target. They look at the same data and draw the opposite conclusion: “higher for longer”. Based on the data, I’m still in the latter camp. if you have any questions.


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