Inflation Eased Slightly in April, According to Fed’s Preferred Measure

The so-called core PCE index—which excludes volatile food and energy prices—increased 4.9% in April from a year ago, down from 5.2% in the year through March. On a monthly basis, core prices rose a seasonally adjusted 0.3%, the same as in February and March. That pace marked a moderate slowdown from the average monthly pace for the previous four months.

The Fed faces the tough challenge of tightening monetary policy enough to ease inflation and cool the economy without quashing growth. Officials raised rates earlier this month by half a percentage point, the biggest increase since 2000. They expected to need to again raise interest rates by a half-percentage point at each of their next two meetings, according to minutes from the Fed’s May 3-4 meeting, released Wednesday.

While the Fed is more focused on the PCE price index, the public and many investors are more aware of the consumer-price index published by the Labor Department, which rose at an 8.3% annual pace in April—2 percentage points higher than the PCE price index. The CPI usually runs hotter than the PCE index due to differences in how the measures are constructed. However, that gap is its largest since 1981, when inflation was retreating from double-digit highs as tight monetary policy plunged the U.S. economy into a deep recession.

One key reason for this wedge is that the two measures have different weightings. The CPI captures out-of-pocket expenditures by urban consumers. The PCE price index is much broader, including spending on behalf of households—for example, employer-sponsored healthcare plans, as well as Medicare and Medicaid.

As a result, the PCE price index has a heavier weight for healthcare prices, which have been relatively subdued.

The PCE price index also includes financial-services costs that aren’t in the CPI, and some of those prices have declined recently.

“Financial-services prices are highly sensitive to what’s happening in the stock market,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “So as the Fed tightens policy and stock prices fall, you’re seeing downward pressure on financial-services prices, which is being picked up in the PCE price index.”

Meanwhile, energy and housing costs—all of which have been rising at a rapid pace of late—make up a much bigger share of the basket used for CPI than for the PCE price index, said Blerina Uruci, U.S. economist at

T. Rowe Price Group Inc.

The PCE price index and the CPI also draw from different data sets to measure certain items that happen to have been heavily disrupted by the pandemic, including airline fares and used-vehicle prices. Used-vehicle prices have a bigger weight in the CPI, too.

This wedge could make communications more challenging for the Fed in the coming months, particularly if PCE price-index inflation comes down faster than CPI’s, Ms. Uruci said.

“The data have uniformly been telling them inflation pressures are pretty elevated. And now we’re maybe transitioning into a world where we have some mixed messages,” she said.

Still, it is unlikely to change the Fed’s overall strategy. “The PCE price index might slow faster than CPI but the destination is still 2% and that’s not within reach this year,” Ms. Uruci said. The central bank has set a 2% target for annual inflation.

Things could look very different next year. MacroPolicy Perspectives’ Ms. Rosner-Warburton said the gap will shrink fast once used-vehicle prices and many other pandemic-driven effects start to reverse. In fact, she is currently forecasting that by the end of 2023, a new, much rarer gap will emerge: the CPI’s rate of increase will fall below that of the PCE price index.

Write to Gwynn Guilford at [email protected]

The so-called core PCE index—which excludes volatile food and energy prices—increased 4.9% in April from a year ago, down from 5.2% in the year through March. On a monthly basis, core prices rose a seasonally adjusted 0.3%, the same as in February and March. That pace marked a moderate slowdown from the average monthly pace for the previous four months.

The Fed faces the tough challenge of tightening monetary policy enough to ease inflation and cool the economy without quashing growth. Officials raised rates earlier this month by half a percentage point, the biggest increase since 2000. They expected to need to again raise interest rates by a half-percentage point at each of their next two meetings, according to minutes from the Fed’s May 3-4 meeting, released Wednesday.

While the Fed is more focused on the PCE price index, the public and many investors are more aware of the consumer-price index published by the Labor Department, which rose at an 8.3% annual pace in April—2 percentage points higher than the PCE price index. The CPI usually runs hotter than the PCE index due to differences in how the measures are constructed. However, that gap is its largest since 1981, when inflation was retreating from double-digit highs as tight monetary policy plunged the U.S. economy into a deep recession.

One key reason for this wedge is that the two measures have different weightings. The CPI captures out-of-pocket expenditures by urban consumers. The PCE price index is much broader, including spending on behalf of households—for example, employer-sponsored healthcare plans, as well as Medicare and Medicaid.

As a result, the PCE price index has a heavier weight for healthcare prices, which have been relatively subdued.

The PCE price index also includes financial-services costs that aren’t in the CPI, and some of those prices have declined recently.

“Financial-services prices are highly sensitive to what’s happening in the stock market,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “So as the Fed tightens policy and stock prices fall, you’re seeing downward pressure on financial-services prices, which is being picked up in the PCE price index.”

Meanwhile, energy and housing costs—all of which have been rising at a rapid pace of late—make up a much bigger share of the basket used for CPI than for the PCE price index, said Blerina Uruci, U.S. economist at

T. Rowe Price Group Inc.

The PCE price index and the CPI also draw from different data sets to measure certain items that happen to have been heavily disrupted by the pandemic, including airline fares and used-vehicle prices. Used-vehicle prices have a bigger weight in the CPI, too.

This wedge could make communications more challenging for the Fed in the coming months, particularly if PCE price-index inflation comes down faster than CPI’s, Ms. Uruci said.

“The data have uniformly been telling them inflation pressures are pretty elevated. And now we’re maybe transitioning into a world where we have some mixed messages,” she said.

Still, it is unlikely to change the Fed’s overall strategy. “The PCE price index might slow faster than CPI but the destination is still 2% and that’s not within reach this year,” Ms. Uruci said. The central bank has set a 2% target for annual inflation.

Things could look very different next year. MacroPolicy Perspectives’ Ms. Rosner-Warburton said the gap will shrink fast once used-vehicle prices and many other pandemic-driven effects start to reverse. In fact, she is currently forecasting that by the end of 2023, a new, much rarer gap will emerge: the CPI’s rate of increase will fall below that of the PCE price index.

Write to Gwynn Guilford at [email protected]