PCE inflation stayed flat in April, bringing 'sigh of relief' to investors

May 31, 2024 3:23 PM

The personal consumption expenditures (PCE) index, an important measure of inflation, remained flat from March to April 2024.

When it comes to inflation numbers, the CPI (consumer price index) usually gets all the attention. But it's the PCE (personal consumption expenditures) that the Federal Reserve pays the most attention to.

By that measure, inflation held remarkably steady last month, according to the U.S. Bureau of Economic Analysis. In April, the year-on-year change in the PCE was 2.7%, exactly the same as it had been in March. And year-on-year PCE excluding food and energy — the Fed's preferred measure — was 2.8%, also the same as in March.

That's still not quite down to the Fed's target of 2%. But for many investors and analysts, no news was good news. After months of higher-than-expected inflation data — including two upticks in the CPI in February and March — Wall Street welcomed a flat, predictable PCE.

"The market has spent this year worried about inflation, and there was a sigh of relief this morning when it wasn't higher than expected," said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.

Investors aren't just hoping for lower inflation for its own sake. For months, the Fed has insisted it needs to see more evidence of cooling prices before it lowers interest rates — an action that would lower business costs and likely boost the stock market. But as inflation remained stubborn, the central bank has held the federal funds rate frozen at 5.25% to 5.5%, where it's been for the past 10 months.

Some hope the latest PCE data will help give the Fed the reassurance it needs. On a month-to-month basis, expenditures were up 0.2% in April, down from 0.7% in March. This raised both concerns and hopes: Cooling consumer spending could hurt the broader economy, but it may also give the Fed a reason to cut rates sooner.

What does all this mean for wealth management? Do the latest PCE numbers bring us closer to a soft landing or to a recession? How will the markets respond? Which investments will benefit from the news, and which ones will get hurt?

For answers, we turned to a variety of financial analysts, and they gave us a variety of answers. Here's what they're saying:

One step closer

Bret Kenwell, U.S. investment analyst at eToro

"The most recent PCE data is good news for investors and consumers, and it inches us closer to a soft landing. That said, an in-line report doesn't mean we're out of the woods quite yet. That's particularly true for the Fed, which will need to see several favorable inflation reports before feeling confident enough to lower rates. Inflation is moderating, but we still need to see it decline.

"The Fed has continued to lean cautiously dovish despite several higher-than-expected inflation reports to start off the year. The favorable inflation reports from May move the Fed one step closer to lowering rates. We're not there yet, but continued progress on inflation should justify lower rates in the second half of the year.

"Since this morning's PCE data takes us one step closer to looser financial conditions from the Fed, it can be viewed as a positive for both bonds and stocks. Regarding the latter, that's particularly true for interest-rate sensitive groups, like real estate, utilities and small caps."

Good news and bad news

Gene Goldman, chief investment officer at Cetera Financial Group

"Overall, with the PCE deflator coming in as expected, this is good news. PCE deflator data suggests that inflation today is not as bad as the readings had suggested earlier in the year.

"For the Fed, it gives them a sense of relief and they can do nothing at this point. The data suggests that there is no reason for them to hike rates, and now the question is when they will cut rates.

"For financial advisors, this data continues to drive the story of 2024: Market volatility is back. With financial markets so focused on daily readings of data, market fluctuations have been all over the place — the case in point was April's sharp decline, followed by May's sharp rise. Weeks ago, bad data was good news. Now we need to worry about bad data being bad news. This weakness in consumer spending starts to raise questions about the economy and financial markets will become jittery until a path is found."

Be careful what you wish for

Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance

"This week's most important economic data came and went without deviating much from expectations. The inflation data was the most anticipated and that came in right in line with consensus, but the spending numbers were a little less than expected.

"The market has spent this year worried about inflation, and there was a sigh of relief this morning when it wasn't higher than expected. There may even be some good news in the report, to the extent that a slowing in consumer spending could portend lower inflation numbers.

"We are in a be-careful-what-you-wish-for moment, because if slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result, then that will be good for markets. However, if consumer spending — and the economy — slows too quickly, then corporate profits and stock prices will go down much more quickly than the Fed will be able to cut rates, so we would be careful at this point."

Slow and steady

Roger Aliaga-Diaz, global head of portfolio construction at Vanguard

"Overall, we view the April PCE report as a step in the right direction due to the deceleration in services excluding shelter (and the persistent weakness in goods). However, the continued firmness in shelter reinforces our view that core PCE will remain sticky through 2024 and base effects will likely nudge the year-end value higher to 2.9% year-on-year. The April report may offer some reassurance to the Fed that holding policy rates steady for long enough could deliver the results they're after."

PCE inflation stayed flat in April, bringing 'sigh of relief' to investors

One step closer

Good news and bad news

Be careful what you wish for

The splurge is over

Slow and steady