PCE inflation holds at 3.8% in April, dimming rate-cut hopes

The Federal Reserve's preferred inflation gauge held at 3.8% in April, while monthly readings came in cooler than expected, offering little clarity on when rate cuts could begin.

"For those that are counting on a rate cut in the second half of this year, they can forget it, because this kind of data makes it increasingly unlikely that we will get one in 2026 or even for all of next year," Chris Zaccarelli, chief investment officer at Northlight Asset Management, said.

The Commerce Department's Bureau of Economic Analysis reported Thursday that the Personal Consumption Expenditures price index rose 3.8% from a year earlier, matching the March reading and economists' expectations. Core PCE, which strips out volatile food and energy prices, ticked up to 3.3% from 3.2%. On a monthly basis, headline PCE rose 0.4%, below the 0.5% consensus, while core rose 0.2%, under the 0.3% estimate. The 10-year Treasury yield slipped below 4.49% after the data, while stock futures pared earlier losses. Dow Jones Industrial Average futures were down 0.2%, with Nasdaq 100 and S&P 500 contracts near flat.

The data complicates the Fed's path forward. First-quarter gross domestic product was revised down to 1.6% from an initial 2.0%, while personal income was flat in April against expectations for a 0.4% gain — a combination that raises stagflation concerns. The Fed's target for inflation is 2% per year, and the current readings remain nearly double that level. The next policy decision is scheduled for June 17-18.

The persistent inflation reflects in part the impact of rising oil prices tied to the conflict in the Middle East. West Texas Intermediate crude rose 2.3% to $90.70 a barrel Thursday after the U.S. and Iran reportedly exchanged military strikes, while Brent crude climbed 2.1% to $96.25. Higher energy costs feed directly into transportation and production expenses, adding to the price pressures the Fed is trying to contain.

The last time headline PCE exceeded 3.5% for consecutive months was in mid-2023, when the Fed was still raising rates. At that time, the S&P 500 fell 4.2% over the following six weeks as markets repriced the rate path. The current backdrop differs in one critical respect: growth is slowing alongside elevated inflation. The downward revision to first-quarter GDP, combined with flat personal income, suggests consumers may be running out of the savings buffer that sustained spending through 2025.

Goldman Sachs warned in a note last week that "there is a growing risk that rising bond yields, along with a slowing economy or inflationary pressures, could trigger a stock market correction." The Cleveland Fed's Inflation Nowcasting model projects headline PCE will rise further to 4.06% in May, with core at 3.36%, suggesting the inflation problem is far from resolved.

For markets, the implications are stark. If inflation remains sticky above 3.5% while growth slows, the Fed faces a choice between tightening into a weakening economy or accepting above-target inflation for longer. Overnight index swaps currently price no rate cuts through year-end, a view Zaccarelli's commentary reinforces. Gold fell 1.5% to $4,380 an ounce Thursday, while Bitcoin slipped to $73,400 from overnight highs above $75,300, as risk assets broadly repriced against the prospect of sustained tight monetary policy.

This article is for informational purposes only and does not constitute investment advice.