What To Expect From Friday’s Report On Inflation

The Federal Reserve’s preferred measure of inflation likely fell to a fresh low since September, but a second good report on prices in as many months isn’t likely to convince officials to lower interest rates.

Friday’s report on inflation, income, and spending by the Bureau of Economic Analysis will likely show consumer prices rose 2.2% over the last 12 months ending in April, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. That would be a fresh low since September, marking a milestone in the Fed’s efforts to stamp out the post-pandemic inflation surge.

The PCE report is likely to echo the trends of a different official inflation measure, the Consumer Price Index, which showed that falling gas prices significantly decreased in April.

Falling gas prices have more than offset the impact of President Donald Trump’s tariffs on consumer prices, according to an analysis by economists at Goldman Sachs. However, that likely won’t be true for much longer, as merchants begin to pass on the cost of the new import taxes to consumers, Goldman forecasted.

Even as gas prices have fallen, “core” inflation, which excludes prices for food and gas, has stayed more stubborn. Core inflation is expected to stay at an annual rate of 2.6%, the same as in March, according to the median forecast. That’s especially important because the Fed uses core inflation to assess whether it’s hitting its annual 2% inflation goal. Before the pandemic, core PCE inflation was typically less than 2%.

How Will the Inflation Report Affect the Fed’s Interest Rate Decisions?

Several Fed officials, fearing the tariffs could reignite inflation, have said they’ll wait and see where trade policy settles and how it influences the economy before changing the Fed funds rate, which affects borrowing costs on all kinds of loans.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, voiced those concerns early Tuesday at a banking conference in Japan.

“Massive shocks create uncertainty for policymakers, both in understanding the underlying dynamics of the shocks themselves and, for some shocks, in determining the appropriate policy response,” he said in prepared remarks. “In such moments, taking time to get more information to help inform the collective judgments of policymakers may be the best of an imperfect set of options.”

Fed officials have kept the fed funds rate elevated this year, putting upward pressure on borrowing costs, to discourage borrowing and cool down inflation. The Fed cut rates several times last year as inflation fell, but the possibility of tariffs shook the outlook.

Trump’s unpredictable tariff-raising campaign has raised fears of an economic slowdown and a surge in prices, which threatens both halves of the Fed’s “dual mandate” to keep inflation and unemployment in check.

Financial markets are betting the Fed will hold rates steady at its next two meetings over the summer before cutting in September, as a slowing economy will emerge as more of an urgent problem than inflation, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.