The Federal Reserve’s preferred measure of inflation came in lower than expected in April, which will likely ratchet up pressure on the Fed to lower interest rates.
The personal consumption expenditures (PCE) price index climbed 2.1% in April compared to a year ago, according to data released Friday by the U.S. Commerce Department’s Bureau of Economic Analysis. Economists polled by Morningstar had predicted a 2.2% yearly increase.
April’s 2.1% year-over-year gain was the lowest of any month this year. In March, the PCE index rose 2.3% compared to the prior year, while February saw a 2.6% annual increase and January registered a 2.5% gain. The Federal Reserve’s target inflation rate is 2%.
The PCE index is a measure of changes in the prices of goods and services purchased by U.S. consumers. On a monthly basis, the PCE index rose 0.1% after staying flat in March.
Core PCE, which strips out more volatile food and energy costs, also increased 0.1% last month following March’s flat reading. On a year-over-year basis, core PCE was up 2.5% in April compared to a 2.6% reading in March.
Wells Fargo economists Tim Quinlan and Shannon Grein observed that the Commerce Department report did not show significant impacts from the Trump administration’s global tariffs, some of which took effect in mid-April.
“At this early stage, there is not any particularly compelling evidence tariffs have had a material impact on inflation … yet,” the Wells Fargo analysis stated. “As we think about the rest of the year, we suspect inflation will be characterized by a continued slight cooling in services inflation and a boost from the goods side that will largely be a function of how things play out in the ever-changing world of tariffs.”
Personal income rose 0.8% on a monthly basis in April compared to a 0.5% gain in March. However, the Commerce Department report noted that the April spike was largely due to a rise in Social Security payments.
Meanwhile, consumers spent less and saved more in April compared to the prior month. Personal consumption expenditures increased 0.2% in April versus 0.7% in March. The personal saving rate, which is the percentage of disposable personal income saved, was 4.9% in April compared to 3.9% in March.
The better-than-expected inflation report comes on the heels of Wednesday’s release of the minutes from the Federal Reserve’s May monetary policy meeting. The minutes revealed a Fed that remained concerned about the impacts of tariffs on inflation.
“The staff’s inflation projection was higher than the one prepared for the March meeting,” the minutes read. “Tariffs were expected to boost inflation markedly this year and to provide a smaller boost in 2026; after that, inflation was projected to decline to 2% by 2027.”
The Fed meeting minutes also showed that committee members were concerned about the possibility of stagflation, which is when inflation rises in concert with heightened unemployment and stagnant economic growth.
