• Core PCE rose 0.2% month over month in April, below the 0.3% estimate.
  • Headline PCE increased 0.4% month over month, slightly under the 0.5% consensus.
  • Year-over-year core PCE held at 3.3%, still well above the Fed's 2% target.

The Federal Reserve's preferred inflation gauge showed a modest cooling in April, with core personal consumption expenditures (PCE) rising just 0.2% from March, slightly below economists' expectations for a 0.3% gain. The headline PCE index, which includes volatile food and energy prices, increased 0.4% month over month, also undershooting the 0.5% forecast. On an annual basis, core PCE remained at 3.3%, while headline PCE stood at 3.8%, both unchanged from the prior month.

The data, released by the Bureau of Economic Analysis on Friday, suggest that inflation pressures are easing gradually but remain stubbornly above the central bank's 2% goal. "This is a step in the right direction, but not a game-changer," said a senior economist at a major investment bank, who asked not to be identified discussing private analysis. "The Fed will need to see several more months of similar or better readings before considering rate cuts."

Services inflation, particularly in housing and healthcare, continues to be a primary driver of core PCE stickiness. Goods prices, on the other hand, have shown some disinflation, helped by improving supply chains and moderating demand. The mixed signals leave policymakers in a wait-and-see mode, with the next Federal Open Market Committee meeting scheduled for June 11-12. Markets are pricing in a roughly 50% chance of a quarter-point rate cut by September, according to CME FedWatch data.

Consumer spending, adjusted for inflation, rose 0.2% in April, down from a 0.4% gain in March, indicating some cooling in demand. Personal income increased 0.4%, slightly above expectations, providing support to households. The saving rate edged up to 3.6% from 3.5%.

The report comes amid a broader debate about the trajectory of inflation and the appropriate path for monetary policy. Some Fed officials have recently suggested that rates may need to stay higher for longer if inflation proves persistent. Others have pointed to softening economic data as a reason to ease. "The core PCE reading is welcome news, but it's just one data point," said a former White House economist now at a think tank. "The Fed will want to see a sustained trend before changing course."

Investors reacted cautiously, with Treasury yields dipping slightly and stock futures edging higher. The S&P 500 was on track for a modest gain as of midday trading.

Correction: An earlier version of this article misstated the month-over-month change in consumer spending. It has been corrected to show a 0.2% increase.