April PCE Inflation Report Shows Encouraging Stability, But Markets Brace for Tariff Wave

The April Personal Consumption Expenditures (PCE) inflation report delivered a dose of stability for markets, with both headline and core inflation figures coming in line or slightly better than expected. The data reaffirmed a modest disinflationary trend for now, offering temporary relief to investors wary of persistent price pressures. However, post-release price action in bond markets suggests lingering concerns about the inflation outlook—particularly the looming impact of new tariffs. A Truth Social post from former President Donald Trump referencing China also appeared to escalate market fears of renewed trade tensions, possibly dampening the market’s initial optimism.

The Bureau of Economic Analysis reported that headline PCE rose 0.1% month-over-month in April, exactly matching the consensus estimate and up marginally from an unchanged print in March. On a year-over-year basis, headline PCE cooled to 2.1%, below the 2.2% estimate and down from March’s 2.3% reading. Core PCE, which strips out volatile food and energy prices and is closely watched by the Federal Reserve, also increased by 0.1% MoM—slightly better than the prior month's flat reading and right in line with estimates. Year-over-year core PCE came in at 2.5%, matching consensus and down from 2.6% in March.

Taken together, these numbers painted a picture of steady, manageable inflation, providing further evidence that the Fed’s restrictive policy is having the intended effect. Personal income also jumped by 0.8% in April, well above the expected 0.3%, while personal spending increased by 0.2%, in line with forecasts. However, real consumer spending rose just 0.1%, a marked slowdown from March’s 0.7% gain. The deceleration in real spending may reflect a reversion to trend after strong March data that many analysts had attributed to front-loaded activity ahead of tariff implementation.

Despite the broadly favorable inflation data, Treasury yields rose in the aftermath of the release. The 10-year yield ticked higher, and short-term rate futures pared earlier gains. One key reason for this counterintuitive move may lie in a Trump social media post on China, which stoked fears of a ramp-up in tariffs and reignited concerns over trade war-driven inflation. In addition, economists are warning that April’s inflation report may be the calm before the storm. According to commentary from analysts at TD Securities and others, tariff-driven price increases are expected to begin surfacing in May and June inflation data, with effects likely to intensify into July.

Adding complexity to the inflation narrative is the fact that consumer price data in the summer of 2024 softened considerably. As a result, year-over-year comparisons will become less favorable in the months ahead, making it harder for headline inflation figures to show progress even if month-to-month trends remain benign. As Nick Timiraos of The Wall Street Journal noted on social media, “Forecasters anticipate price growth in goods to pick up in May and especially in June as the Liberation Day tariffs bite.”

Another complicating factor is the recent plunge in goods imports. Bloomberg reported that U.S. April goods imports fell 19.8% month-over-month, the largest drop on record. Some economists attribute this to a front-loading of imports ahead of tariff deadlines and Liberation Day holidays, suggesting that April’s PCE data may still reflect an outdated environment—one that could soon shift dramatically.

From a monetary policy perspective, the report did little to shift expectations in the near term. The odds of a rate cut at the June or July Fed meetings remain low, but September is still viewed as the most likely starting point for easing. According to CME FedWatch data, market-implied probability for a September cut ticked slightly higher after the report, but the consensus remains cautious. Fed officials, including John Williams and Neel Kashkari, have emphasized the importance of monitoring the inflation impact from tariffs before making any changes to policy.

In his recent press conference, Fed Chair Jerome Powell reiterated the need for patience, citing "a great deal of uncertainty about tariffs", and the potential for upward pressure on prices. Today's data did little to resolve that uncertainty, offering a short-term reprieve but not a long-term answer.

Looking ahead, markets will focus squarely on the May and June inflation prints for clearer direction. If core PCE continues to trend at or below 0.2% monthly, that could give the Fed sufficient cover to move in September. However, any upside surprise tied to tariff pass-through or deteriorating base effects could derail that timeline.

In summary, the April PCE data marked a constructive step forward for inflation watchers, coming in right on target or slightly better across key metrics. But markets are not celebrating just yet. With trade risks back in the spotlight and tariff effects looming, the real test of the disinflation narrative may begin next month. Until then, investors are walking a fine line between optimism and skepticism—caught between the Fed's steady hand and Washington's tariff saber-rattling.