The country’s measure of inflation, the Personal Consumption Expenditures Price Index (PCE) , rose to 4.4% in April from March’s 4.2%, as reported by the US Bureau of Economic Analysis on Friday. Economists expected 3.9%. 

The Federal Reserve’s preferred gauge of inflation, the Core PCE Price Index, also rose to 4.7%, beating the projected 4.6%. 

Both PCE and Core PCE inflation saw 0.4% monthly increases. Additionally, Personal Income grew by 0.4% monthly while Personal Spending increased by 0.8%.

Us Dollar Rebounds After Inflation Data Confirms Sticky Rate And Us Yield Curve Increases

After the PCE Core Deflator revealed a higher increase than previous months and above expectations, the US Dollar regained its previous strength against most currencies. 

Amidst ongoing debt-ceiling talks, President Biden hints towards a spending freeze and rejects the possibility of default. 

Recent data prompts an increase in the US Dollar Index above 104, portraying more upcoming rate hikes from the Fed.

PCE vs. CPI: Why it Matters and What You Need to Know Now

Inflation in the United States has reached historic highs, which can be attributed to several factors. These include strong consumer demand, supply-chain disruptions, higher food and commodity prices due to Russia’s invasion of Ukraine, and the cost of shelter.

Additionally, wage increases driven by a strong job market contribute to the rise in prices of goods and services.

Measuring Inflation: CPI vs. PCE

There are two primary measures of inflation used in the United States: the Consumer Price Index (CPI) and the Personal Consumption Expenditures Index (PCE). Each index has its own differences in data sources, coverage, and formulas.

The CPI represents a stagnant basket of goods and services and is calculated based on the prices of a fixed set of goods and services.

On the other hand, the PCE encompasses a wider range of goods and services from a broader group of buyers and tracks how consumers change their buying patterns in response to price changes.

This greater flexibility leads to smoother price changes and typically lower levels of reported inflation, better reflecting consumer experiences.

The Federal Reserve’s Response to Inflation

The Federal Reserve has announced that it will be using the PCE as its primary measure of inflation due to its ability to account for changing consumer preferences and more comprehensive coverage of goods and services.

Currently, inflation levels exceed the Federal Reserve’s long-run objective of 2% on the core PCE Index, leading to a series of rate hikes.

Market Concerns

Markets are concerned about high inflation levels, which have led to increased uncertainty and volatility. It is important to closely monitor inflation rates and their potential impact on the economy and financial markets.

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